1. Lectures in Microeconomics-Charles W. Upton A Second Cournot Example

2. The Basic Steps Plot the reaction functions –If B produces nothing, A behaves like a monopoly –If B produces competitive output, A produces nothing Solve for their intersection

3. A Second Cournot Example A Second Example Q = 200 – 5P. MC = $10.

4. A Second Cournot Example A Second Example Q = 200 – 5P. MC = $10. The Competitive Solution requires that P = MC, so Q = 200 – 5(10) = 150.

5. A Second Cournot Example A Second Example Q = 200 – 5P. MC = $10. For the Monopoly Solution, we require that MR = MC, as will occur at Q = 75.

6. A Second Cournot Example Duopoly Reaction Functions When B produces nothing A should react by producing the monopoly output (75).

7. A Second Cournot Example Duopoly Reaction Functions When B produces nothing A should react by producing the monopoly output (75). When B produces the output of the competitive industry (150), A should react by producing nothing.

8. A Second Cournot Example Duopoly Reaction Functions When B produces nothing A should react by producing the monopoly output (75). When B produces the output of the competitive industry (150), A should react by producing nothing. Similar rules apply for B’s reactions.

9. A Second Cournot Example Graphing the Reaction Function A’s Output B’s Output A’s Reaction Function B’s Reaction Function 75 150 50

10. A Second Cournot Example Next Steps Generalize to include more than two firms. Develop a concept called Nash Equilibrium. Develop an alternative duopoly model, the Bertrand Model.

11. A Second Cournot Example End ©2003 Charles W. Upton