Question

Suppose now that two firms can produce at a constant average (and marginal) cost of AC = MC = 5. The firms face the same market as previously the monopolist, i.e. a market demand curve given by Q = 53 - P, where Q=Q1+Q2 is the total produced quantity and P is market price per unit. Let Q1 be the output of firm 1 and Q2 be the output of firm 2. Suppose each firm chooses its profit-maximising level of output under the assumption that its competitor's output is fixed (Hint: this is the Cournot model). Find each firm's reaction curve

Answer 1

The Cournot model is used to analyze an oligopoly market where two firms choose their profit-maximizing level of output while assuming competitor's output is fixed. The reaction curve represents the relationship between each firm's output and the competitor's output.

Step-by-step explanation:

The Cournot model is a mathematical model used to analyze an oligopoly market where two firms produce at a constant average and marginal cost. In this scenario, each firm chooses its profit-maximizing level of output while assuming that its competitor's output is fixed. The reaction curve for each firm represents the relationship between its output and the competitor's output.