Consider a market with two firms (firm a and firm b). Both have zero costs of pr

Question

Consider a market with two firms (firm a and firm b). Both have zero costs of production and produce an identical product. Denote output from firm a as q_a and that from firm b as q_b. Given outputs q_u and q_b the market price is P = 10 - q_a - q_b. The firms produce output sequentially. Firm a produces q_a, which firm b observes. Firm b then produces q_b. Derive the Nash Equilibrium outputs and profits. Points are based on showing and explaining your work. No points for solving for the simultaneous game (Cournot).

Explanation / Answer

In game theory Nash equilibrium is a solution concept of a non cooperative game involving two or more player , In which each player is assumed to know the equilibrium stratgies of the player has anything to gain by changing only their own strategy.

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