Question

1. When would Cournot competition seem like a more reasonable model than Bertrand competition?

1. Output levels can be quickly changed in response to price changes
2. Production capacity is difficult to change

For the next three problems use the following data. Two firms in a duopoly each have a constant marginal cost of 4. The price function (demand) is P(Q)=100-Q.

2. Suppose that Firm 1 believes that Firm 2 will produce half of the monopoly output, q₂=24. How much should Firm 1 produce to maximize profit in the current period?

1. 0
2. 36
3. 24
4. 48

3. What is the Cournot Nash equilibrium level of output for Firm 1?

1. 96
2. 48
3. 32
4. 24

4. If competition is instead price competition a la Bertrand with identical products what will the equilibrium level of output be for each firm?

1. 96
2. 48
3. 32
4. 24

Answer 1