Recall that in the Cournot model, the strategic variable is the output quantity. Each firm decides
how much of a good to produce. All firms know the market demand curve, and each firm knows
the cost structures of the other firms. The essence of the model: each firm takes the other firms'
choice of output level as fixed and then sets its own production quantities.
Let's walk through an example. Assume all 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 all firms face the same cost structure as follows:
MC_i = 10 for all firms I
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
i
is fixed for all firms
i
not equal to 1. Firm 1's reaction
curve will satisfy its profit maximizing condition,
MR
1 =
MC
1 . In order to find Firm 1's
marginal revenue, we first determine its total revenue, which can be described as follows
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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
 staff

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