Question

Suppose the inverse demand for a good is given by P = 30 - 2Q, where Q is the total quantity supplied by all firms in the market. Suppose any firm in the market has a constant marginal cost of 14. a. Assume the market consists of two firms that set their quantities simultaneously.Calculate the duopoly levels of production and the equilibrium price. [7 marks] b. Now assume firm 1 chooses its production level before firm 2 does. What will be the equilibrium quantities, price and profits in this case? [10 marks] c. Now suppose that if firm 2 wishes to enter the market then it has to pay a fixed cost of4. If firm 1 (who again is the first mover) chooses to produce a quantity q₁ = 6, what will be firm 2's profit? What conclusions can you draw concerning firm 2's entrance decision-and firm 1's profit? [8 marks]

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