There are two firms which compete in quantities. Both firms have a constant marginal cost of 12 and zero fixed costs. The market demand curve is p = 75 - 3Q, where Q = Q1 + Q2.
Make sure you use this demand curve and marginal cost in the problem below. Not the demand curve and marginal cost in the handout or previous problems.
1. Find the best response for firm one when firm one has the monopoly belief.
2. What output level by firm two (the dumping belief of firm one) will cause firm one to produce nothing?
3. Find the residual demand and marginal revenue curves for firm one when firm one believes that firm two will produce 7.
4. Find the best response for firm one when firm one believes that firm two will produce 7.
5. Graph residual demand, marginal revenue, and marginal cost for firm one in a single diagram when firm two produces 7. Label the Intercepts in your diagram. Use an arrow to explain how the optimal output level is determined by the curves in your diagram. Use another arrow to explain how the market price is determined in your diagram. The optimal output and price should be indicated numerically in your diagram.
6. Graph both firms best response curves in one diagram. Label the intercepts in your diagram. Use an arrow to indicate the Nash equilibrium in your diagram. The equilibrium quantities should be indicated in your diagram.