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29 May, 11:02

An industry demand curve faced by firms in a duopoly is P = 69 - Q, where Q = Q1 + Q2. MC for each firm is 0. How many units should each firm produce? How much money will each firm make?

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  1. 29 May, 14:16
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    You first need to establish the benefits function B. For each firm it is equal to the amount produced (q1 for firm 1 and q2 for firm 2) multiplied by the price P, minus cost C. It is

    B1 = P. q1 - C1 = (69 - q1 - q2) q1 - C1

    B2 = P. q2 - C2 = (69 - q1 - q2) q2 - C2

    As firma Will maximize benefits we need the derivative in q1 and q2 for firms 1 and 2 respectively. This will give us

    69 - 2q1 - q2 = 0

    69 - q1 - 2q2 = 0

    Note that the derivative of cost is null as marginal cost is null.

    Thus,

    q2 = 69 - 2q1

    Replacing on the second equation:

    69 - q1 - 138 + 4q1 = 0

    -69 + 3q1 = 0

    q1 = 69/3=23

    Replacing in the q2 equation:

    q2=69 - 46 = 23

    To find the money they make replace in benefits function. First we find piece P=69-23-23=23. Thus:

    B1=23*23-C1

    B2=23*23-C2

    As we don't have a value for C1 and C2 we can't compute a number for benefits. If you have these values you will have the benefits.
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