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Question 3 [word limit: 750] Consider a duopolistic market served by two firms, firm 1 and firm 2. The two firms produce, respectively, quantities q1
Question 3 [word limit: 750] Consider a duopolistic market served by two firms, firm 1 and firm 2. The two firms produce, respectively, quantities q1 and q2 and compete to maximise own profits. Suppose that market demand is given by p = 1- Q where Q = q1 + 92. Suppose that the two firms incur production costs equal to C1(q1) = C191 C2 (92) = C292 and 1 > c1 > C2 > 0. a. Suppose that the two firms move simultaneously. Derive and describe the Cournot/Nash equilibrium, specifying for which range of parameters both firms provide a strictly positive quantity in equilibrium. Provide a graphical representation of the best response functions and equilibrium. [25 marks]
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