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There are only two firmsa and b and each has a cost

a) Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two firms,A and B, and each has a cost function TC = 2 + q. Determine the Cournot equilibrium.

b) Draw a graph that shows the effect on the equilibrium quantities if the government subsidises one firm in a Cournot duopoly with a per-unit subsidy. Assume that the best-response functions are linear. Explain the new equilibrium quantities.

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