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##### he inverse market demand curve for paper is given by P=400-2Q. There are two firms who produce fax paper. Each firm has unit cost of production equal to c=40, and they compete in the market quan-tities. That is, they can choose any quantity to produce, and they make the quantity choices simulta-neously.

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solution

**Question**

2 The inverse market demand curve for paper is given by P=400-2Q. There are two firms who produce fax paper. Each firm has unit cost of production equal to c=40, and they compete in the market quan-tities. That is, they can choose any quantity to produce, and they make the quantity choices simulta-neously.;a. Show how to derive the Cournot Nash equilibrium to this game. What are the firm?s profits in equilibrium?;b. What is the monopoly output, that is the one that maximizes total industry profit? Why isn?t pro-ducing one half the monopoly output a Nash equilibrium outcome? Explain and show why;c. Suppose now that firm 1 has a cost advantage. Its unit cost is constant and equal to c=25 whereas firm 2 has the higher unit cost of c=40. What is the Cournot outcome now? What are the firm?s profits?

Paper#15798 | Written in 18-Jul-2015

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