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_AB

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.]