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    Examples and Exercises On Nash Equilibrium of Cournot's Model

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    jujuyuk
    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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    Examples and Exercises On Nash Equilibrium of Cournot's Model

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    jujuyuk
    108 views3 pages
    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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    Examples and Exercises on Nash Equilibrium of Cournot's Model

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    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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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    108 views3 pages

    Examples and Exercises On Nash Equilibrium of Cournot's Model

    Uploaded by

    jujuyuk
    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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    © All Rights Reserved
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    of 3

    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

    1/3

    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

    2/3

    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

    3/3

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