There are two firms in a market for commercial dry suits. The market demand curve is P = 4,500 – 2.5Q. Firm 1 has a total cost curve of C = 1,000 q with zero fixed costs, while Firm 2 has a total cost curve of C = 1,500 q with zero fixed costs. They have decided not to collude with each other in order to avoid a Sherman-1 antitrust violation.
a) If the 2 duopolists behave as independent, asymmetric Cournot duopolists, what are the equilibrium price, quantity, and profits for each of the firms? Show work.
b) Graph the residual demand curve for firm 1 if firm 2 produces q2 = 250. Identify the vertical and horizontal intercepts numerically, and label the axes. The graph does not have to be to scale (no graph paper needed). Show work.
c) Graph the reaction function for firm 1. Identify the vertical and horizontal intercepts numerically, and label the axes (with q1 on the horizontal axis and q2 on the vertical axis). The graph does not have to be to scale (no graph paper needed). Show work.