Two firms (call them A and B) compete in Cournot fashion by choosing quantity. Both
C Q 10 2Q
firms have identical technologies with the following cost functions:
Q P 26 P
The market demand is given by
1. What is firm As residual demand if firm B produces 0 units? What price would
firm A charge? (calculate)
2. What is firm As residual demand if firm B produces 6 units? What price would
firm A charge? Hint: firm A is a monopoly after 6 units are subtracted from
the demand
3. What is firm As residual demand if firm B produces Q B units?
4. What is firm As marginal revenue if firm B produces Q B units?
5. What is firm As quantity if firm B produces Q B units?
6. How much should firm B produce so that firm A would not produce anything
even if firm A did not have a fixed cost?
7. Write firm As best response function?
8. Write firm Bs best response function?
9. Draw both firms response functions on the graph below. Label axis and points
where best response functions intersect axis. Label which reaction function
belongs to which firm.
10.Solve for Cournot equilibrium quantity of each firm and the total market
quantity.
11.Solve for Cournot equilibrium price.
12.Find profits of each firm. Do you expect entry or exit in the long run?
Imagine that the government wants to subsidize firm B by offering 1 dollar subsidy
C Q 10 2 1 Q 10 Q
per unit. Firm Bs cost becomes
Q__