In a duopolist market two firms can produce at a constant average and marginal cost of AC = MC = 2. They face the market demand curve P = 14 – Q, where Q = Q1 + Q2, here Q1 is the output of Firm 1, Q2 is the output of Firm 2. In the Cournot’s model: (i) Find the action-reaction functions of the two firms. (ii) What are the profits of the two firms. (iii) Calculate the profit maximizing levels of output (Q1 and Q2) and price.
Introduction In the Cournot model of duopoly, two firms compete by choosing quantities simultaneously and independently. Each firm chooses its output assuming the other firm’s output is fixed. The goal is to maximise profit given the market demand and cost conditions. Let’s solve the numerical parts of this problem step by step. Given: Market demand: […]