Suppose the demand for donuts in Bethlehem is; P = 10 – Q where Q =...

Suppose the demand for donuts in Bethlehem is;

P = 10 – Q where Q = qA + qB

There are only two firms that sell donuts in Bethlehem, Firm A and Firm B. Each firm has the same cost function;

TC = 2 + q

a. Determine the Cournot equilibrium.

b. Explain why the intersection of the best-response functions is the Cournot equilibrium.

Expert Solution

Answer)

Cournot's Model is a example of oligopoly industry in which firms are assumed to determine their output simultaneously given that output produced by other firms remain constant. We use concept of Reaction Curve to arrive at cournot's equilibrium. Reaction curves represent profit maximization output produced by one firm for a given level of output produced by other firm. Cournot Equilibrium is a Nash Equilibrium.

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Rahul Sunny answered 7 months ago

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