Question 3 Consider a market served by two fmns, l and 2, and suppose that demand is given by P = a – h Q where Q = It}1 + qz. Suppose that the two

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Question 3 Consider a market served by two fmns, l and 2, and suppose that demand is given by P = a – h Q where Q = It}1 + qz. Suppose that the two firms incur costs equal toErmi] = 5’31’5}in = (”is a. Suppose that the two fimis move simultaneously and o :3- c 2:- t}.i. Derive the Wash equilibrium and provide a graphical representation of the best response fimctions. [15 marks]ii. 1|.’I”.I”hat happens to the equilibrium if parameter :2“ increases? Provide economicintuition of the result. [5 marks] b. Suppose now that fu’m l delegates production decisions to a manager who targets acombination of profits and sales:U1 = “1 + ’31Firm 2 chooses oz to maximize own profits 1:2. Derive the Nash equilibrium and provide a graphical representation of the bestresponse functions. Compare this answer with what you have reported in ad, Provideeconomic intuition of the result. [III] marks] c. Suppose now that both f’n’ms delegate production decisions to managers who target acombination of profits and sales:Ur = “’1 + Q1”2 = “a + it: Derive the Nash equilibrium and provide a graphical representation of the bestresponse fimctions. Compare this answer with what you have reported in agin. and b.Provide economic intuition of the result. [It] marks]

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