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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
Marks)
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)