1) Consider a Cournot duopoly with the following inverse demand function: P = 100 −2Q 1 −2Q2.

The
firms' cost functions are identical and are given by C(Q𝑖) = 10 + 2Q𝑖. Based on this information, firm 1
and 2's reaction functions are:
a) r1(Q2) = 24.5 − 0.5Q2 and r2(Q1) = 24.5 − 0.5Q1
b) r1(Q2) = 44 − 0.5Q2 and r2(Q1) = 44 − 0.5Q1.
c) r1(Q2) = 49 − 0.5Q2 and r2(Q1) = 49 − 0.5Q1.
d) r1(Q2) = 49 − 0.25Q2 and r2(Q1) = 49 − 0.25Q1.

MR1 = 100 − 4Q1 − 2Q2 MC1 = 2 Equating, 100 − 4Q1 − 2Q2 = 2,

r1(Q2) = 24.5 −0.5Q2 & r2(Q1) = 24.5 −0.5Q1

2) Based on the correct reaction functions from Q1, what are the values of Q1 and Q2 that are produced
by the firms? What are the corresponding profits levels?

r1(Q2) = 24.5 − 0.5r2(Q1) Q1 = 24.5− 0.5(24.5− 0.5Q1) Q1 = 16.33

Similarly, Q2 = 24.5− 0.5(24.5− 0.5Q2) Q2 = 16.33
P = 100 – 2(16.33) – 2(16.33) = 34.66 π1 = 34.66 × 16.33 – (10 + 2 × 16.33)
π1 = 523.55 π2 = 523.55

3) Consider a Stackelberg duopoly with the following inverse demand function: P = 100 − 2Q 1 − 2Q2. The
firms' marginal costs are identical and are given by MCi = 2. Based on this information, the Stackelberg
follower's reaction function is:
a) QF = 24.5 − 0.25QL.
b) QF = 49 − 0.25QF.
c) QF = 24.5 − 0.5QL.
d) QF = 24.5 − QL.

MRF = 100 − 4QF − 2QL MCF = 2

Equating, 100 − 4QF −2QL = 2, rF(QL)= 24.5 − 0.5QL

4) Consider a Stackelberg duopoly with the following inverse demand function: P = 100 − 2Q 1 − 2Q2. The
firms' marginal costs are identical and are given by MCi = 2. Based on this information, the Stackelberg
leader's reaction function is:
a) QL = 24.5 − 0.5QF.
b) QL = 50 − 0.5QF.
c) QL = 49 − 0.5QF.
d) None of the preceding answers is correct.

RL = (100 − 2QF − 2QL) QL since leader knows the reaction of the followers,
RL = (100 −2(24.5 − 0.5QL) − 2QL) QL Solving for optimality by MRL = MCL
QL = 24.5 Leader’s quantity independent of the follower
5) Based on the correct functions/values from Q3 and Q4, what are the values of Q𝐿 and Q𝐹 that are
produced by the leader and the follower respectively? What are the corresponding profits levels?

QL = 24.5 For the follower, just replace QL choice of the leader into the reaction function.
rF (24.5) = 24.5− 0.5(24.5) QF = 12.25 P = 100 – 2(24.5) – 2(12.25) = 26.5
πL = 26.5 × 24.5 −(10 +2 × 24.5) πL = 590.25
πF = 26.5 × 12.25 – (10 +2 × 12.25) πF = 290.125

6) Consider the three firms Cournot oligopoly with the following inverse demand function: P = 100 − 2Q 1
− 2Q2 −2Q3. The firms' cost functions are identical and are given by C(Q𝑖) = 10 + 2Q𝑖. Based on this
information, firm 1, 2 and 3's reaction functions are:
a) r1(Q2) = 24.5 − 0.5Q1 and r2(Q1) = 24.5 − 0.5Q2 and r3(Q1,Q2) = 24.5 − 0.5(Q1+Q2)
b) r1(Q2,Q3) = 12.25 − 0.5(Q2+Q3) and r2(Q1,Q3) = 12.25 − 0.5(Q1+Q3) and r3(Q1,Q2) =
12.25 − 0.5(Q1+Q2).
c) r1(Q2,Q3) = 49 − 0.33(Q2+Q3) and r2(Q1,Q3) = 49 − 0.33(Q1+Q3) and r3(Q1,Q2) = 49 − 0.33(Q1+Q2).
d) r1(Q2,Q3) = 24.5 − 0.5(Q2+Q3) and r2(Q1,Q3) = 24.5 − 0.5(Q1+Q3) and r3(Q1,Q2) = 24.5 − 0.5(Q1+Q2)

MR1 = 100 − 4Q1 − 2Q2 − 2Q3 MC1 = 2

Equating, 100 − 4Q1 − 2Q2 = 2, r1(Q2,Q3) = 24.5 − 0.5(Q2 + Q3)
r2(Q1,Q3) = 24.5 − 0.5(Q1 +Q3) r3(Q1,Q2) = 24.5 − 0.5(Q1 +Q2)

7) Based on the correct reaction functions from Q6, what are the values of Q1, Q2 and Q3 that are
produced by the firms? What are the corresponding profits levels?

We need to solve the three-equation with three unknown system above to find Q1, Q2 and Q3
in general. However, we have a conjecture to start here. Since the marginal costs are same for
all three firms, the quantity choices should be symmetric, therefore should be equal. Therefore,
for instance using this in r1(Q2, Q3),
Q1 = 24.5 − 0.5(Q2 + Q3) Q1 = 24.5 −0.5(Q1 + Q1) Q1 = 12.25
Since the solution is symmetric, Q2 = 12.25 Q3 = 12.25
Profits, P = 100 − 2Q1 − 2Q2 − 2Q3 = 26.5
π1 = 26.5 × 12.25 – (10 + 2 × 12.5) π1 = 290.125 π2 = 290.125 π3 = 290.125

8) You are a potential entrant into a market that previously has had entry blocked by the government.
Your market research has estimated that the inverse market demand curve for this industry is P = 22,500
– 75Q, where Q is the total quantity of the existing firms. You estimate that if you enter the market, your
own cost function will be C(Q) = 15,300Q. The government has invited your firm to enter the industry,
but it will require you to pay a one-time license fee of $100,000. You do not know the cost functions of
the firms currently in the market; however, the price is now $16,000. Last year 87 units were sold by
existing firms. Would you choose to enter this market? Explain (You presumably will need to make
assumptions about the existing firms’s reaction to your entry).
 Inverse demand function is P = 22,500 - 75(87) - 75Qy = 15,975 - 75Qy. (Qy = your quantity)
Equating MR = MC yields 15,975 - 150 Qy = 15,300. Qy = 4.5 units.
The corresponding price is P = 22,500 - 75(87 + 4.5) = 15,637.5.
Profits if you enter (including license fee) = 15,637.5(4.5) - 15,300(4.5) - 100,000 = -98,481.25.
Therefore, I would not choose to enter the industry given present output by rival firms.

Hani Alharbi
G201468160