1. Suppose there are two firms A and B that sell an identical product (consumers view them as perfect substitutes). Total demand for the product is QD= 100 - 12 P, where Q is measured in 1000s. The firms have the same costs: CA= 500 + 20QA+ QA2(CBhas the same form with QB). Both firms know all of this information. Firm A gets to set its output level first, and then firm B chooses output after observing firm A's output.
2. a)Calculate Firm B's best response function. Firm A knows firm B will follow this best response function in response to A's output. Use this to calculate firm A's profit maximizing output decision.Use B's BR to calculate a residual demand curve for A.
3. b)Calculate B's profit maximizing output(B's best response to QAfrom 4a), the price of the good, and the profits each firm makes.