Question

The car market is populated by two firms, Alpha (A) and Blue (B), facing total demand p=10���q, where p is the price and q denotes total quantity. On the costs side, firms are perfectly symmetric, with tci = 2qi, i = A, B. Assume the following timing: at time 1, Alpha chooses its output; at time 2, Blue chooses its output. Which is the market equilibrium?

Answer 1

Market equilibrium is achieved when both Alpha and Blue, each facing identical cost functions, produce where their marginal costs equal marginal revenue, considering their sequential output decisions.

Step-by-step explanation:

The car market scenario described involves two firms, Alpha (A) and Blue (B), which operate in a sequential game where firm Alpha chooses its output first, followed by firm Blue. The market equilibrium in this scenario is found by solving for the quantities each firm produces where each firm sets marginal cost equal to marginal revenue.

Since the firms have identical cost functions and face a common demand, we would expect each to produce where P = MC to maximize profits.

However, since Alpha chooses its output first, Blue's output decision will be based on Alpha's chosen quantity. The exact equilibrium quantity would need to be calculated using the Cournot model, taking into account the sequential decision-making process and reaction functions of each firm.