3. (Optional: 15 points extra credit possible) Two firms are engaged in Cournot

Question

3. (Optional: 15 points extra credit possible) Two firms are engaged in Cournot competition. Their best response functions are given by m(y1) = 15- (a) Suppose firm 1 is producing 10 units of output ( 10). If firm 2 is profit maximizing, what level of output should the choose? (b) What is the Nash equilibrium quantity for each firm? (c) Suppose both firms are producing at their Nash equilibrium quantities. If firm 1 were to unilaterally decide to increase production, what would happen to their profits? Why?

Explanation / Answer

a) Given that y1 = 10. Now this implies y2 = 15 - 10/2 = 15 - 5 = 10. Hence firm 2 will produce 10 units as well

b) Nash equilibrium has both firms producing equal output. Hence it is when both firms produce 10 units

c) When one firm increases its production, profits of that firm rises but profits of the other firm falls. This is because the price faced by them is same. With repeated intereractions this tendency will be realized by the rival and it will also increase production which further reduces profits.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.