Cournot’s duopoly

Consider the following Cournot’s duopoly, where two identical firms compete by setting quan-tities. Suppose the Market demand is P = 80 − 2Q and firm’s cost function is TC = 20qi. (a) Determine firm’s equilibrium quantity, profit and the market equilibrium price. Explain. (b) Now suppose that firm 1 can set the quantity first. Find each firm’s equilibrium quantity, profit and equilibrium price. Explain. (c) Let’s get back to the Cournot’s model. Suppose firms decide to form a cartel. In the static (one-period) case, will they be able to sustain the cartel? Explain using the appropriate pay-off matrix. (d) How will your answer to part (c) change if you consider the infinitely-repeated game? Show all your work! (Hint: you will need to find the range of values for the discount factor)


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