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Examples and Exercises On Nash Equilibrium of Cournot's Model

Example: each of two firms has the cost function TC(y) = y2. The inverse demand function for the firms' output is p = 120 Q, where Q is the total output. The best response function of firm 1 is given by b1(y2) = (90 y2) / 2. The output of each firm is 30. Each firm's profit is (30)(120 30 30) (30)(30) = 900.

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187 views3 pages

Examples and Exercises On Nash Equilibrium of Cournot's Model

Example: each of two firms has the cost function TC(y) = y2. The inverse demand function for the firms' output is p = 120 Q, where Q is the total output. The best response function of firm 1 is given by b1(y2) = (90 y2) / 2. The output of each firm is 30. Each firm's profit is (30)(120 30 30) (30)(30) = 900.

Uploaded by

jujuyuk
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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08/04/2016

ExamplesandexercisesonNashequilibriumofCournot'smodel

ExamplesandexercisesonNashequilibriumofCournot'smodel
TofindaNashequilibriumofCournot'smodelforaspecificcostfunctionanddemandfunctionwe
followthegeneralprocedureforfindingaNashequilibriumofagameusingbestresponsefunctions.

Example
EachoftwofirmshasthecostfunctionTC(y)=30ytheinversedemandfunctionforthefirms'outputis
p=120 Q,whereQisthetotaloutput.Whatarethefirms'outputsinaNashequilibriumofCournot's
model?
Firstfindthefirms'bestresponsefunctions.Firm1'sprofitis
y1(120

y1

y2)

30y1.

Takingthederivativeofthisprofitwithrespecttoy1(holdingy2constant)andsettingthederivative
equaltozeroweobtain
120

2y1 y2

30=0,

or
y1=(90 y2)/2.
Thusthebestresponsefunctionoffirm1isgivenbyb1(y2)=(90 y2)/2.Thisfunctionisshown
inthefollowingfigure.

Similarly,wefindthatthebestresponsefunctionoffirm2isgivenbyb2(y1)=(90 y1)/2.This
functionissuperimposedonthebestresponsefunctionoffirm1inthefollowingfigure.

https://www.economics.utoronto.ca/osborne/2x3/tutorial/COURNX.HTM

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08/04/2016

ExamplesandexercisesonNashequilibriumofCournot'smodel

Wenowneedtofindapair(y1,y2)ofoutputswiththepropertythat
y1=b1(y2)andy2=b2(y1).
Thatis,
y1=(90 y2)/2andy2=(90 y1)/2.
Substitutingoneequationintheotherweobtainy1=(90 (90
substitutingintheequationfory2wegety2=30.

y1)/2)/2,sothaty1=30

WeconcludethatthereisauniqueNashequilibrium,inwhichtheoutputofeachfirmis30.Eachfirm's
profitis(30)(120 30 30) (30)(30)=900.

Example
EachoftwofirmshasthecostfunctionTC(y)=y2.Asinthepreviousexample,theinversedemand
functionforthefirms'outputisp=120 Q,whereQisthetotaloutput.Whatarethefirms'outputsina
NashequilibriumofCournot'smodel?
Firstfindthefirms'bestresponsefunctions.Iffirm1choosestheoutputy1itsprofitis
y1(120

y1

y2)

y12.

Takingthederivativeofthisprofitwithrespecttoy1(holdingy2constant)andsettingthederivative
equaltozeroweobtain
120

2y1 y2

2y1=0,

or
y1=(120 y2)/4.
Thusthebestresponsefunctionoffirm1isgivenbyb1(y2)=(120 y2)/4.
https://www.economics.utoronto.ca/osborne/2x3/tutorial/COURNX.HTM

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08/04/2016

ExamplesandexercisesonNashequilibriumofCournot'smodel

Similarly,wefindthatthebestresponsefunctionoffirm2isgivenbyb2(y1)=(120 y1)/4.
Wenowneedtofindapair(y1,y2)ofoutputswiththepropertythat
y1=b1(y2)andy2=b2(y1).
Thatis,
y1=(120 y2)/4andy2=(120 y1)/4.
Substitutingoneequationintheotherweobtainy1=(120 (120
substitutingintheequationfory2wegety2=24.

y1)/4)/4,sothaty1=24

WeconcludethatthereisauniqueNashequilibrium,inwhichtheoutputofeachfirmis24.Eachfirm's
profitis(24)(120 24 24) (24)2=1152.

Exercise
Anindustrycontainstwofirms,onewhosecostfunctionisTC(y)=30yandanotherwhosecostfunction
isTC(y)=y2.Theinversedemandfunctionforthefirms'outputisp=120 Q,whereQisthetotal
output.Whatarethefirms'outputsinaNashequilibriumofCournot'smodel?
[Solution]
Copyright1997byMartinJ.Osborne

https://www.economics.utoronto.ca/osborne/2x3/tutorial/COURNX.HTM

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