The firms have different marginal costs

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Consider a model of Cournot competition as studied in class, with 2 firms and a linear inverse demand function P(Q) = a – Q (where Q = q1 + q2 is the total quantity produced by the two firms and a is a parameter). The firms have different marginal costs: c1 for Firm 1 and c2 for Firm 2. (a) Find the Nash equilibrium. (b) Assume Firm 1’s marginal cost is larger (c1 > c2). Which firm produces more in equilibrium? How do the quantities produced in equilibrium change if Firm 1 improves its technology, leading to a slightly lower c1 (while c2 is unchanged)? (c) Find the total quantity produced and each firm’s profit in equilibrium. Describe what happens to these when Firm 1 changes its technology as above.

Reference no: EM131002686

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