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Cournot equilibrium outputs

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1. Suppose two rival firms face the following industry demand curve, and respective cost curves:

P = 500 - q1 - q2 (Market demand)

TC1 = 50q1 and TC2 = 50q2 (Respective total cost curves for firm 1 and 2).

MC1 = 50 and MC2 = 50 (Respective marginal cost curves for firm 1 and 2)

a.) Find the Cournot equilibrium outputs for each firm.
b.) Find the industry price that is associated with these output levels.
c.) Find the profit level for each firm and for the industry.

2.) Suppose firm-1 is the first-mover and considers firm-2's reaction when determining its output.

a.) Find the new set of equilibrium outputs for these two rivals.
b.) Find the industry price that is associated with these output levels.
c.) Find the new profit level for each firm and for the industry.

3.) Suppose these firms choose to compete

a.) Find the new set of equilibrium outputs for these two rivals.
b.) Find the industry price that is associated with these output levels.
c.) Find the new profit level for each firm and for the industry.

4.) Suppose these firms are able to successfully collude

a.) Find the new set of equilibrium outputs for these two rivals.
b.) Find the industry price that is associated with these output levels.
c.) Find the new profit level for each firm and for the industry.
d.) What are the implications of the differing firm profit levels derived from using these three different models? For instance, why would firm-1 receive higher profit when it behaves as a first-mover as opposed to behaving in the standard Cournot manner?

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Solution Summary

The expert finds the Cournot equilibrium outputs for each firm.

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