ECON 390
Question 1. [20 pts] Consider a Cournot duopoly game in which rms 1 and 2 simultaneously choose quantities to produce (q1 and q2 respectively), that
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Note: This is a Game Theory question.

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Question 1. [20 pts] Consider a Cournot duopoly game in which firms
1 and 2 simultaneously choose quantities to produce (q1 and q2 respectively),
that need to be nonnegative. The market price is given by p = 100 — 2q1 — 2q2.
Suppose that each firm’s marginal cost is 20. Firms want to maximize their
profits. a) [4 pts] Derive the firms’ best response functions. What is the set of never
best response strategies for each firm? b) [3 pts] What is the set of strategies for each firm that survive two rounds
of elimination of never best response strategies? (2) [6 pts] What is the Nash equilibrium of the game? d) [7 pts] Now suppose firm 1’s marginal cost is reduced to 10 (while firm
2’s marginal cost remains 20). What is the new best response function of Firm
1, and what is the new Nash equilibrium of the game?
Subject: Business, Economics

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