A duopoly face market demand Q= 100 - P. The marginal cost of each firm is 40 and fixed costs are zero.
a) suppose firm one is incumbent and can commit to an output level before firm Two make an entry decision. Find optimal quanties of firm One and it it enters , firm Two, will produce.
b) calculate optimal profits
of each firm.
a) Firm One's optimal quantity is 40, and if Firm Two enters, it will produce 60.
b) Firm One's optimal profit is 1000 (100 x 40 - 40 x 40) and Firm Two's optimal profit is 800 (100 x 60 - 40 x 60).