Consider a market in which 2 firms produce identical products. The total cost to

Question

Consider a market in which 2 firms produce identical products.

The total cost to each firm to produce Q units is 4*Q. (In other words, the marginal cost of production is constant at $4.)

Demand in the market is such that the price P = 40 - (Q1 + Q2), where Q1 is the quantity that the first firm brings to the market, and Q2 is the quantity that the second firm brings to the market.

Consider the outcome of the firms' independent choices of what quantity to bring to the market:

For example - If each firm produces 18 units, then the market price will be P = 4, and each firm's profit would be $0.

Or - If one firm produces 18 units and the other firm produces 12 units, then the market price will be P = 10, the firm producing 18 units will make a profit of $108, and the firm producing 12 units will make a profit of $72.

(a) If each firm produces 12 units, then the market price will be P =  , and each firm will make a profit of $  .

(b) If each firm produces 9 units, then the market price will be P =  , and each firm's profit will be $  .

(c) If one firm produces 18 units and the other firm produces 9 units, then the market price will be P =  , the firm producing 180 units will make a profit of $ , and the firm producing 90 units will make a profit of $ .

(d) If one firm produces 12 units and the other firm produces 9 units, then the market price will be P =  , the firm producing 12 units will make a profit of $ and the firm producing 9 units will make a profit of $ .

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Question 33 pts

In the market described above, what is firm 2's best response if the first firm's quantity produced is:

(a) Q1 = 18? The second firm's best response is Q2 =

(b) Q1 = 12? The second firm's best response is Q2 =

(c) Q1 = 9? The second firm's best response is Q2 =

Explanation / Answer

(First question)

P = 40 - (Q1 + Q2) = 40 - Q1 - Q2

MC1 = MC2 = 4

Profit (Z) = Q x (P - MC)

(a) Q1 = Q2 = 12

P = 40 - 12 - 12 = $16

Each firm's profit = 12 x $(16 - 4) = 12 x $12 = $144

(b) Q1 = Q2 = 9

P = 40 - 9 - 9 = $22

Each firm's profit = 9 x $(22 - 4) = 9 x $18 = $162

(c) Q1 = 18, Q2 = 9

P = 40 - 18 - 9 = $13

Profit for firm producing 18 units = 18 x $(13 - 4) = 18 x $9 = $162

Profit for firm producing 9 units = 9 x $(13 - 4) = 9 x $9 = $81

(d) Q1 = 12, Q2 = 9

P = 40 - 12 - 9 = $19

Profit for firm producing 12 units = 12 x $(19 - 4) = 12 x $15 = $180

Profit for firm producing 9 units = 9 x $(19 - 4) = 9 x $15 = $135

NOTE: As per Chegg answering guidelines, first question is answered.

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