Consider a duopoly case that firm 1 and firm 2 are producing homogeneous product

Question

Consider a duopoly case that firm 1 and firm 2 are producing homogeneous products:
(a) Suppose that the two firms compete in output and set their output levels simultaneously. Given that firm 1’s reaction curve is Q1 = 150 – 2Q2 and firm 2’s reaction curve is Q2 = 150 – 2Q1, what are the two firms’ output levels in equilibrium?
(b) Suppose that the two firms compete in output but firm 1 can take the lead in setting its output level, will the two firms expect higher or lower profits compared to the results in part (a)?
(c) Suppose that the two firms compete in price and have identical marginal costs, what will be their prices in equilibrium? Will the two firms have the incentive to raise prices to the level that maximizes joint profits? Briefly explain.

Explanation / Answer

a) equilibrium level will be solution of given two equations that is Q1=50 Q2=50 b) it will increase as the profit of second firm will be the same as in first c)if marginal costs are same than equilibrium price will be same for both firms yes becouse both firms will be able to get a greater profit than their initial condition

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