In: Economics
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.
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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