Answer to Question #154468 in Microeconomics for Ravi

Question

Suppose there are two profit-maximizing firms 1 and 2 producing q1 and q2 units respectively of a homogeneous good. The marginal cost of production for both the firms are c. The inverse demand function for this good is p = 1 – Q, where p is the price and Q = q1 + q2 is the total output produced by these firms. Suppose the firms choose their outputs sequentially with firm 1 moving first and firm to following it (after observing firm 1’s choice). In equilibrium, outputs chosen by the firms are

a) (q1, q2) = ((1-c)/3, (1-c)/3)

b) (q1, q2) = ((1-c)/2, (1-c)/4)

c) (q1, q2) = ((1-2c)/2, (1-c)/4)

d) None of the above

Answer 1

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