Suppose that Iran and Iraq are Cournot duopolists in the crude oil market and face the following market demand function_P=100 – (q1 + q2);Where q1 represents the output levels of the two countries with Iran being “I” and Iraq being “2” and P is the per-barrel price. The marginal revenue schedules facing the two countries are:MR1 = 100 -2q1 –q2; and MR2 = 100 – 2q2 – q1Each country has a marginal cost curve of the formMCi = qi; Where i = 1, 2.Suppose that Iraq is Stackelberg leader in the preceding problem. What will be each country’s reaction function? How much will each country produce, and what will the profits be?
Iran being the Stackelberg follower, its reaction function is determined by setting MR =MC.Therefore, for Iran: MR1 = MC1⇒ 100 – 2q1 – q2 = q1⇒ 3q1 = 100 – q2⇒ q1 = (100/3) –…
