Practice+Final+1_Solution

# Quarterincand

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Unformatted text preview:   Final Exam          QUESTION 1. Cournot Competition [35 points]       Nickel is a commodity whose market is dominated by two players Quarter Inc. and Dime  Inc. The two companies must decide simultaneously (without knowledge of each other’s  decision) how much nickel to produce and supply to the market. Once both firms select  their output quantity, the market price adjusts to clear the market. So, each firm really  acts as a “quantity taker, price maker”: it chooses its quantity based on a conjecture  about the quantity it expects its competitor to choose, taking into account how its own  quantity decision affects the market price.     The market price for nickel is determined as follows: if the total quantity (in tons)  extracted by the firms is Q, then the market price per ton is given by the relationship:     .    For instance, if Quarter Inc. decides to extract 20 tons and Dime Inc. decides to extract  30 tons, the market price would be \$65 per ton ( = 90 – ½(20+30) ). Quarter Inc. and  Dime Inc. must each individually and simultaneously decide between supplying only  three quantities: 50 tons, 60 tons or 80 tons.  The marginal cost of extracting and  supplying nickel is zero for both firms.  You should assume as usual that Quarter Inc. and  Dime Inc. are both rational firms seeking to maximize their own profits.    Below is a chart of the market prices and profits for different choices that Quarter and  Dime can make; some of the cells have been filled...
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