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Consider a model where two firms choose some variable q (firm 1 chooses q 1 and firm 2 chooses q2). Their reaction curves are R1(q2)=12
Consider a model where two firms choose some variable q (firm 1 chooses q 1 and firm 2 chooses q2). Their reaction curves are R1(q2)=12 - 2q2, and R2(q1)=12 - 2q1. a) Find a Nash equilibrium for this game, and graph the reaction curves. b) Consider dynamic adjustment. Start at q1=4.1, and q2=3.8. How would firm 1 want to adjust its output taking 2's output as given? If firm 1 made that adjustment, what would firm 2 want to do? Draw these changes on a graph. Does production converge to the Nash equilibrium?
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