Suppose that inverse demand is given by p(Q) = a-bQ, where Q is total quantity supplied in the market. There are two firms in the market, each with a cost function of c(q) = cq, now assume that the first firm moves before the second firm.
A) Explain why we solve dynamic models backwards
B) What is the best response function of the second mover?
C) Write out the profit function of the first firm and how does it change from the Cournot game?
D) Solve for the equilibrium level of quantities in this game