A reaction curve for Firm 1 is a function Q 1 * () that takes as input the quantity produced by Firm 2 and returns the optimal output for Firm 1 given Firm 2's production decisions. In other words, Q 1 * ( Q 2 ) is Firm 1's best response to Firm 2's choice of Q 2 . Likewise, Q 2 * ( Q 1 ) is Firm 2's best response to Firm 1's choice of Q 1 . Let's assume the two firms face a single market demand curve as follows: Q = 100 - P where P is the single market price and Q is the total quantity of output in the market. For simplicity's sake, let's assume that both firms face cost structures as follows: MC_1 = 10 MC_2 = 12 Given this market demand curve and cost structure, we want to find the reaction curve for Firm 1. In the Cournot model, we assume Q 2 is fixed and proceed. Firm 1's reaction
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 12/13/2011 for the course ECO 1320 taught by Professor Staff during the Fall '11 term at Texas State.