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Two firms engage in simultaneous quantity competition in a market whose demand is given by P(Q) = 24 (q1 q2). Firm 1 has 0 MC.
Two firms engage in simultaneous quantity competition in a market whose demand is given by P(Q) = 24 (q1 q2). Firm 1 has 0 MC. Firm 2 has MC that depends on whether it is a good year or a bad year. If it is a good year Firm 2 also has 0 MC. If it is a bad year, then firm 2 has constant MC = 3 for every unit. The probability of a good year is 1/2. (a) Suppose first that firm 2 does not know whether it is a good year or a bad year. Both firms maximize expected profit. Find the NE quantities for both firms. Hint: you should treat this the same as a standard quantity competition game where firm 2 has constant MC = 3/2. 10 points (b) Now suppose that both firms know whether it is a good or bad year for firm 2. Calculate the Nash Equilibrium quantities in both cases, and the expected profits for both firms (i.e. weight each case's profits by 1/2.) 10 points (c) Suppose now that firm 2 knows whether it is a good year or not, but firm 1 does not. This means that firm
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