The inverse market demand for a generic drug is P = 200 – Q, where Q is total market output and P is the market price. Two firms, 1 and 2, have complete control of the supply of the drug. Firm 1 has total cost equal to 20q while firm 2 has total cost equal to 40q. Assume firms compete on quantity (a la Cournot). Suppose firm 1 chooses to produce 30 units.
a) What would firm 2's best response (quantity) be?
b) Compute firm 1's Nash equilibrium quantity.
c) Compute firm 2's Nash equilibrium quantity.
d) Compute firm 1's Nash equilibrium profits.
e) Compute firm 2's Nash equilibrium profits.