Question

Consider a market with two dominant firms (curnot duopoly) producing a homogenous product. The inverse market demand function is given by

Answer 1

Every firm chooses the quantity of production, which maximizes its profit according to the ideas
of the possible decisions of the other duopolist. Each duopolist considers the quantity of
production of another as a fixed value, which does not depend on his own decisions. Both
companies take decisions at one time. According to the Cournot duopoly, the price will depend
on the summary quantity of production of both firms.
So, demand function is:
P=a-b*(Q 1 +Q 2 ), where Q 1 – quantity of production of the first firm, Q 2 – quantity of production
of the second firm.