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Unformatted text preview: => Q1* = 92/3 By the same logic, we find: Q2* = 86/3 Again, we leave the actual computation of Q 2 * as an exercise for the reader. Note that Q 1 * and Q 2 * differ due to the difference in marginal costs. In a perfectly competitive market, only firms with the lowest marginal cost would survive. In this case, however, Firm 2 still produces a significant quantity of goods, even though its marginal cost is 20% higher than Firm 1's. An equilibrium cannot occur at a point not in the intersection of the two reaction curves. If such an equilibrium existed, at least one firm would not be on its reaction curve and would therefore not be playing its optimal strategy. It has incentive to move elsewhere, thus invalidating the equilibrium....
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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.
- Fall '11