Answer Happy

1. Two firms engage in simultaneous quantity competition in a market whose demand is given by P(Q) = 24 - (9₁ +92). Firm 1 has 0 MC. Firm 2 has MC that depends on whether it is a good year or a bad year. If it is a good year Firm 2 also has 0 MC. If it is a bad year, then firm 2 has constant MC = 3 for every unit. The probability of a good year is 1/2. (a) Suppose first that firm 2 does not know whether it is a good year or a bad year. Both firms maximize expected profit. Find the NE quantities for both firms. Hint: you should treat this the same as if firm 2 had constant MC = 3/2. 10 points (b) Suppose now that firm 2 knows whether it is a good year or not, but firm 1 does not. This means that firm 2 can condition their quantity on their cost but firm 1 cannot. Find the NE quantities for both firms in a good year and in a bad year. 10 points (c) Now suppose that before observing whether it is a good year or a bad year, firm 2 can commit to disclose this information to firm 1 or not. If they do not disclose we are in the world of the previous part. Does firm 2 choose to disclose or not disclose? 10 points (d) Provide some economic intuition for your previous answer, i.e. do not appeal to the specific calculations you did. Hint: consider an extreme version of the question where there is uncertainty about MCs but in each state the MC of the firms are vastly different. 10 points