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# tutorial_11ans - ECOS 2001 Tutorial 11 1. Two firms are...

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ECOS2001 Tutorial 11 1 ECOS 2001 Tutorial 11 1. Two firms are selling an identical product and they both have constant marginal costs of c. If the firms simultaneously set prices, what is the Nash equilibrium in this game? P1 = P2 = c is the unique Nash Eq 2. There are two firms in a market selling a homogeneous good. They have identical constant marginal costs of production of c. Inverse demand for a product is given P(Q) = a – bQ, where Q = q1 + q2. Firms simultaneously set quantities. (a) Derive the reaction function for each firm. 1 21 12 () 2 3 ab q c qq b ac b −− = == 2 2 b = ; 1 2 b = (b) Find the Nash equilibrium in this game. Compare it to the perfectly competitive outcome and the monopoly outcome. 3 b Total output in the Cournot game is less than the competitive level of output but greater than the monopoly (profit maximising) level of industry output. 3. Consider the following entry game. Virgin Blue can enter the market (E) or decide to not enter (NE). If they choose NE Qantas gets a profit of 20 and Virgin gets a profit of 5. If Virgin chooses to E, Qantas can then choose to either punish

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## This note was uploaded on 04/20/2010 for the course ECOS 2001 taught by Professor None during the One '09 term at University of Sydney.

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tutorial_11ans - ECOS 2001 Tutorial 11 1. Two firms are...

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