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Price Theory<Assignment 2 { Market Power

Two rms produce a homogeneous product. Market demand for the product is given
by the equation, Qd=500000-800P
Firms 1 and 2 have marginal costs of MC 1= 65 and MC2= 120 respectively. Firms
compete by simultaneously selecting the quantity of output that they will produce for
sale in the market
Question 1:
Rearrange the demand function to nd inverse demand for this market. (2
Question 2:
Find the residual demand function for each rm, and the corresponding
marginal revenue function. (3 Marks)
Question 3:
Find each rm’s best response function. (2 Marks)
Question 4:
Solve the best response functions simultaneously to identify the equilibrium
quantities. (3 Marks)
Question 5:
Find the equilibrium market price. (2 Marks)
Question 6:
Find the equilibrium pro ts of both rms. (3 Marks)
Question 7:
How much would rm 2 be willing to pay to lower its marginal cost to 65
(matching rm 1’s marginal cost). (5 Marks)

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