Question
Consider a Cournot duopoly with two firms 1,2. Let q1, q2 be the quantities produced by firms 1,2. The price p is given by the
Consider a Cournot duopoly with two firms 1,2. Let q1, q2 be the quantities produced by firms 1,2. The price p is given by the inverse demand p = 24 Q where Q = q1 + q2. The unit cost of firm 1 is c1 = 2 and the unit cost of firm 2 is c2 = 14.
(a) [4 points] Drawing the best response functions in a diagram, identify Nash Equilibrium (NE) quantities of firms 1,2 and find their numerical values. (b) [4 points] Suppose firm 1 is constrained by capacity K = 8, while firm 2 has no capacity constraint. Draw the best response functions and find NE quantities of this capacity constrained duopoly. (c) [4 points] Suppose firm 2 is constrained by capacity K = 3, while firm 1 has no capacity constraint. Draw the best response functions and find NE quantities of this capacity constrained duopoly. (d) [4 points] Suppose both firms 1,2 are capacity constrained. Firm 1 is constrained by capacity K1 = 8 and firm 2 is constrained by capacity K2 = 3. Draw the best response functions and find NE quantities of this capacity-constrained duopoly.
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