# Firm 1 and Firm 2 compete by simultaneously choosing quantity. Both firms sell an identical...

## Question:

Firm 1 and Firm 2 compete by simultaneously choosing quantity. Both firms sell an identical product in a market with inverse demand {eq}D (Q) = 235 - 3Q {/eq}. Firm i's cost function is {eq}c_i (q_i) = 14 q_i {/eq} and both firms know each other's cost function. They are the only firms supplying this market so {eq}Q = q_1 + q_2. {/eq} Each firm can choose any {eq}q_i \geq 1. {/eq}

a. How many units will each firm produce in equilibrium?

b. What will be the equilibrium price in the market?

c. Suppose the firms were to collude and produce a total quantity that maximises their total profit. That is, the two firms act as a monopolist. What total quantity would they produce?

## Cournot Model of Oligopoly:

Developed by French mathematician Augustine Cournot, cournot model of oligopoly is a type of competition where two firms in oligopoly market structure compete on non-price techniques, for instance level of output and marketing. The firms make output or marketing decisions independently, simultaneously and at the same time.

## Answer and Explanation: 1

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In Cournot model, firms maximize profit by producing where marginal revenue equals marginal cost. The market output come from both firms:

{eq}Q=(...

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Chapter 4 / Lesson 16Learn what an oligopoly is and its market effects, and view examples of oligopolies. Understand non-price competition and how oligopolies affect price competition.

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