Question #3 in pdf ONLY!!!
3. Consider a homogeneous-good duopoly in which inverse demand is given by P(Q) = 2 − Q, where Q
denotes the total output in the market. Firm 1’s marginal cost is c1 = 1 while firm 2’s is c2 = c ∈ [0, 1.5].
(a) (3 points) Determine the Cournot equilibrium outputs and the associated social welfare (as a function
of the parameter c).
(b) (3 points) Determine the Stackelberg equilibrium outputs when firm 1 chooses its output first. Determine
the associated social welfare.
(c) (3 points) For what values of c does the Cournot equilibrium give greater social welfare and for which
does the Stackelberg equilibrium?