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Oligopoly (Cournot Model)

Oligopoly (Cournot Model) - Their costs are given by C 1 =...

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Comm 295 Practice Problems Oligopoly (Cournot Model) 1. Consider two firms facing the demand curve P = 10 - Q, where Q = Q 1 + Q 2 . The firms’ cost functions are C 1 (Q 1 ) = 4 + 2Q 1 and C 2 (Q 2 ) = 3 + 3Q 2 . a. Suppose both firms have entered the industry. What is the joint profit- maximizing level of output? How much will each firm produce? b. What is each firm’s equilibrium output and profit if they behave noncooperatively (hint use the Cournot model)? Draw the firms’ reaction curves and show the equilibrium. 2. Suppose that two identical firms produce widgets and that they are the only firms in the market.
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Unformatted text preview: Their costs are given by C 1 = 30Q 1 and C 2 = 30Q 2 , where Q 1 is the output of Firm 1 and Q 2 the output of Firm 2. Price is determined by the following demand curve: P = 150 – Q, where Q = Q 1 + Q 2 . a. Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium. b. Suppose the two firms form a cartel to maximize joint profits. How many widgets will be produced? Calculate each firm’s profit. c. If firm 2's MC increases, how would the Cournot Nash equilibrium change? Draw a diagram to illustrate your result (No calculation is necessary)....
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