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.