Hello, could you please help me solve this excercise.Thank you very much! Part A [Word limit: 400]Consider a two-firm model with a negative production externality. Let x; denote firm i's output, with i = 1, 2. Suppose that two firms operate in two different competitivemarkets and each firm sells its product in its respective competitive market, at the150, respectively, and that they face the same directprices p₁ = 100 and p2=x²production cost ci(xi)= Let e(x1, x2)= x₁x2 be the external cost on firm 2's2activity generated by the production of firm 1.a. Find each firm's best response function to the output set by the other firmand compute the Nash equilibrium assuming that firms choose their outputnon-cooperatively and independently. Illustrate the equilibrium in anappropriate graph.b. Calculate each firm's equilibrium profits and the total external costimposed on firm 2.

Given information P1=100 P2=150 Both firm are working into perfect competitive market. Total…

Part A [Word limit: 400] Consider a two-firm model with a negative production externality. Let x; denote firm i 's output, with i = 1, 2. Suppose that two firms operate in two different competitive markets and each firm sells its product in its respective competitive market, at the 150, respectively, and that they face the same direct prices p₁ = 100 and p2 = x² production cost c/(x;)= Let e(x1, x2)= x₁x2 be the external cost on firm 2's activity generated by the production of firm 1. a. Find each firm's best response function to the output set by the other firm and compute the Nash equilibrium assuming that firms choose their output non-cooperatively and independently. Illustrate the equilibrium in an appropriate graph. b. Calculate each firm's equilibrium profits and the total external cost imposed on firm 2.

Part A [Word limit: 400] Consider a two-firm model with a negative production externality. Let x; denote firm i 's output, with i = 1, 2. Suppose that two firms operate in two different competitive markets and each firm sells its product in its respective competitive market, at the 150, respectively, and that they face the same direct prices p₁ = 100 and p2 = x² production cost c/(x;)= Let e(x1, x2)= x₁x2 be the external cost on firm 2's activity generated by the production of firm 1. a. Find each firm's best response function to the output set by the other firm and compute the Nash equilibrium assuming that firms choose their output non-cooperatively and independently. Illustrate the equilibrium in an appropriate graph. b. Calculate each firm's equilibrium profits and the total external cost imposed on firm 2.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter19: Externalities And Public Goods

Section: Chapter Questions

Problem 19.3P

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