Every hour, two electricity producers, 1 and 2, compete bysimultaneously choosing
how much electricity to produce and bring to market (i.e.Cournot competition). Firm 1 has an
efficient production technology so that its cost function isgiven by
C
(
q
) =
20
q
, while Firm 2 is
relatively inefficient with a cost function given by
C
(
q
) =
40
q
. Inverse demand for electricity in
the market is given by
P
(
Q
) =
120
−
Q
where
Q
=
q
1
+
q
2
.
(a) Write out each firm’s profit function.
(b) Solve for each firm’s best response function and plot themin a single diagram.
(c) Solve for each firm’s production level in equilibrium. Doesit make sense? Why or why
not?
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