Consider a strategic interaction between firms 1and 2. In Stage 1, firm 1 chooses the level ofadvertising a > 0. In stage 2, firm 2 learns aboutfirm 1's amount of advertising a. Subsequently,firms 1 and 2 compete in a Cournot fashion. Thatis, firms 1 and 2 simultaneously andindependently choose their outputs: q1 and q2,where qi denotes the output of firm i = 1,2. Theprice that the consumers are willing to pay forthe product produced by the two firms, or theinverse aggregate demand function, is given by6a - q1 - q2. Firm 1's advertising cost is a3. Bothfirms have zero production costs. Both firmsmaximize their individual profits (equal to thetotal revenue minus total cost).In the unique subgame perfect equilibrium ofthe game, the two firms will choose thefollowing strategies:a. Firm 1 will choose strategy (a = 3, q1 = a/3)while firm 2 will choose strategy q2 = a/3b. Firm 1 will choose strategy (a = 1, q1 = 16/3 )while firm 2 will choose strategy q2 = 16/3c. Firm 1 will choose strategy (a = 32/3 , q1 = 2a)while firm 2 will choose strategy q2 = 2ad. Firm 1 will choose strategy (a = 8/3 , q1 = 2a)while firm 2 will choose strategy q2 = 2ae. None of the above

Aggregate demand function : P = 6a - q1 - q2 In a simultaneous profit maximizing game both firms…

Consider a strategic interaction between firms 1 and 2. In Stage 1, firm 1 chooses the level of advertising a > 0. In stage 2, firm 2 learns about firm 1's amount of advertising a. Subsequently, firms 1 and 2 compete in a Cournot fashion. That is, firms 1 and 2 simultaneously and independently choose their outputs: q1 and q2,

Consider a strategic interaction between firms 1 and 2. In Stage 1, firm 1 chooses the level of advertising a > 0. In stage 2, firm 2 learns about firm 1's amount of advertising a. Subsequently, firms 1 and 2 compete in a Cournot fashion. That is, firms 1 and 2 simultaneously and independently choose their outputs: q1 and q2,

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.8P

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