Consider a Cournot duopoly with two firms
Consider a Cournot duopoly with two firms 1,2. Let q1, q2 be the
quantities produced by firms 1,2. The price p is given by the inverse demand p = 18 − Q where Q
= q1 + q2. The unit cost of firm 1 is c1 = 5 and the unit cost of firm 2 is c2 = 12.
(a) [4 points] Drawing the best response functions in a diagram, identify Nash Equilibrium (NE)
quantities of firms 1,2 and find their numerical values.
(b) [4 points] Suppose firm 2 is constrained by capacity K2 = 1, while firm 1 has no capacity
constraint. Draw the best response functions and find NE quantities of this capacity constrained
duopoly.
(c) [4 points] Suppose firm 1 is constrained by capacity K1 = 3, while firm 2 has no capacity
constraint. Draw the best response functions and find NE quantities of this capacity constrained
duopoly.
(d) [4 points] Suppose both firms 1,2 are capacity constrained. Firm 1 is constrained by capacity
K1 = 3 and firm 2 is constrained by capacity K2 = 1. Draw the best response functions and find
NE quantities of this capacity constrained duopoly.
You can use the following result without proving it
For a Cournot duopoly with inverse demand p = a − Q, where firm 1 has unit cost c1 and
firm 2 has unit cost c2, the best response functions are given as follows.
Best response of firm 1 (BR1) to q2 is: choose q1 = (a − c1 − q2)/2 if q2 < a − c1 and choose
q1 = 0 if q2 ≥ a − c1.
Best response of firm 2 (BR2) to q1 is: choose q2 = (a − c2 − q1)/2 if q1 < a − c2 and choose
q2 = 0 if q1 ≥ a − c2.
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