To illustrate the use of Cournot model, assume that two identical firms A and B are supplying the market. The firms face

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To illustrate the use of Cournot model, assume that two
identical firms A and B are supplying the market. The firms face a
constant marginal cost c. The inverse demand function for the
market is given as: P = a –bQ, where Q = qA + qB; a>c and
b>0
Set up each firm’s profit maximizing problem and their
best response function (4 marks)
For any one of the firms show how the best response
function in (a) is affected by
a marginal increase in b? Interpret
(2 marks)
a marginal increase in c. Interpret
(2 marks)
Determine the Cournot Nash equilibrium of the game
(3 marks)
Determine the Stackelberg equilibrium output for firm A
and B assuming firm A is the Leader and firm B is the follower
(5 Marks)
Show how equilibrium output of each firm in the
Stackleberg model in (d) is affected by
a marginal increase in b? Interpret
(2 marks)
a marginal increase in c. Interpret
(2 marks)