11) Firms 1 and 2 are duopolists that choose quantities in order to maximize pro

Question

11) Firms 1 and 2 are duopolists that choose quantities in order to maximize profits. Further suppose that Firm 1's best response function is £1 = 80-0.5092. while Firm 2's best response function is q,-60-0.4091 The Nash-Cournot equilibrium quantities are: q! units for firm 1 and qi units form firm 2 A) 62.5; 62.5 B) 35; 62.5 C) 35; 35 D) 62.5; 35 E) None of the above 12) If a firm operating in a perfectly competitive industry maximizes short-run profits by producing some quantity of output q* > 0, which of the following must be true at that level of output? A) p > MC B) MR> MC C) pAVC D) All of the above E) B and C only

Explanation / Answer

11) Solving these best response function gives equilibrium or nash equilibrium quantities.

q2 = 60 - 0.40(80 - 0.5q2)

q2 = 60 - 32 + 0.20q2

0.80q2 = 28

q2 = 35 units

q1 = 80 - 0.5(35) = 80 - 17.5 = 62.5 units

Answer is d) 62.5 units; 35 units

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