Consider a model of cournot competition as studied in class, Ask an Expert

Economics

Consider a model of Cournot competition as studied in class, with 2 firms and a linear inverse demand function P(Q) = a - Q (where Q = q₁ + q₂ is the total quantity produced by the two firms and a is a parameter). The firms have different
marginal costs: c1 for Firm 1 and c² for Firm 2.
(a) Find the Nash equilibrium.

(b) Assume Firm 1's marginal cost is larger (c1 > c2). Which firm produces more in equilibrium? How do the quantities produced in equilibrium change if Firm 1 improves its technology, leading to a lower c1 (while c2 is unchanged)?

(c) Find the total quantity produced and each firm's profit in equilibrium. Describe what happens to these when Firm 1 changes its technology as above.

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