Suppose you are one of the duopolists and you have estimated the market demand f

Question

Suppose you are one of the duopolists and you have estimated the market demand function: P = 1000 – 10*Q. Marginal cost (MC) for both firms is constant at 100. You also know that your firm can easily expand output to 100 units, but you don’t know much about your competitor’s production capacity.

a.Provide a brief comment on your possible options and risks in this duopoly situation!

b.Suppose that currently you and your duopoly competitor are in the Cournot-Nash equilibrium – both producing an equal amount of output and selling at the same price. You suddenly find out that your competitor has a secret – it’s production capacity cannot be expanded beyond 40 units. What would be your response? Why?

Explanation / Answer

Possible options are to increase or decrease output. Greater output would reduce price. Higher output will increase price but revenue will fall if quantity decreases much and price doesn't increase much. Other thing is that my decision will led to change of output of competitor. THIS will have affect on prices, revenue and profits. They may decline by increasing output decision of rival

B. My response will be to lower output as rival firm can't increase output beyond 40.Thus total output will fall and price will increase resulting in higher revenue and higher profit

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.