To illustrate the competitive process in markets dominated by few firms, assume that a two firm duopoly dominates the market for high end semiconductor chips, and that the firms face a linear market demand curve $1,5002 where is price and is total output in the market Let and be the output for the two firms thus For simplicity, also assume that both firms produce an identical product, have no fixed costs, and marginal cost $300 In this circumstance, total revenue for Firm A is A $1,500 A 2 2 A 2 A B Similar total revenue curve holds for Firm B Part A (4 marks) Derive the output reaction curves for Firms A and B Part B (2 marks) Calculate the Cournot market equilibrium price and output Part C (4 marks) Discuss how the Cournot model is related to a prisoners' dilemma Hints you may illustrate your point by comparing the total profits derived from the Cournot equilibrium and the profit derived from a collusion formed by the two firms

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To illustrate the competitive process in markets dominated by few firms, assume that a two-firm duopoly dominates the market for high end semiconductor chips, and

To illustrate the competitive process in markets dominated by few firms, assume that a two-firm duopoly dominates the market for high end semiconductor chips, and that the firms face a linear market demand curve

=$1,5002

where is price and is total output in the market. Let and be the output for the two firms thus +=. For simplicity, also assume that both firms produce an identical product, have no fixed costs, and marginal cost ==$300. In this circumstance, total revenue for Firm A is

_A=$1,500_A2²_A2_A_B

Similar total revenue curve holds for Firm B.

Part A (4 marks)

Derive the output reaction curves for Firms A and B.

Part B (2 marks)

Calculate the Cournot market equilibrium price and output.

Part C (4 marks)

Discuss how the Cournot model is related to a prisoners' dilemma. [Hints: you may illustrate your point by comparing the total profits derived from the Cournot equilibrium and the profit derived from a collusion formed by the two firms.]