There are two firms in the market supplying identical products. The industry market demand is given by P(Y ) = 10-Y , where Y = y1 + y2. Both firms have AC = MC = $1/unit.
(A) Assume that the two firms choose their output levels simultaneously (Cournot Model).
(a) Solve for their reaction functions.
(b) Find the Cournot equilibrium (equilibrium quantities).
(c) Estimate the Cournot profits for the two firms.
(d) Show the reaction functions, the equilibrium, and the isoprofit curves corresponding to the Cournot profits on a graph.
(B) Assume that the two firms choose their prices simultaneously (Bertrand Model).
(e) What will be the equilibrium price in the market? Why?
(f) Solve for the Bertrand equilibrium (equilibrium quantities).
(g) Show the equilibrium point on the same graph.
(h) Which of these two equilibria (Cournot and Bertrand) will be better for the firms? For the consumers?
