Consider the following model of Cournot competition with fixed cost. There are two identical firms, and the inverse demand function is given by P(q1,q2) = 19−(q1 +q2). Firms have constant marginal cost, but any firm operating in this market (that is, qi > 0) must pay a license fee F . In particular, firm i’s cost function is ( attached below ) a) Derive the firms’ best response functions. (b) For what values of F, if any, will there be a symmetric (pure) Nash equilibrium in which firms produce a positive quantity? What is the Nash equilibrium in that case? (c) For what values of F, if any, will both firms shutting down be the symmetric (pure) Nash equilibrium?

Consider the following model of Cournot competition with fixed cost. There are two identical firms, and the inverse demand function is given by P(q1,q2) = 19−(q1 +q2). Firms have constant marginal cost, but any firm operating in this market (that is, qi > 0) must pay a license fee F . In particular, firm i’s cost function is ( attached below ) a) Derive the firms’ best response functions. (b) For what values of F, if any, will there be a symmetric (pure) Nash equilibrium in which firms produce a positive quantity? What is the Nash equilibrium in that case? (c) For what values of F, if any, will both firms shutting down be the symmetric (pure) Nash equilibrium?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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