Question

9. Given Firm 1's best-response curve, show how Firm 2's best-response curve shifts on a graph if its marginal cost changes from m to m+x. Show how the Nash-Cournot equilibrium changes as Firm 2's marginal cost increases. O O Initially, assume the marginal cost for both firms is m, resulting in the best-response functions shown in the graph. 3 Now assume that the second firm's marginal cost of production changes from m to m + x 1.) Using the line drawing tool, graph Firm 2's new best-response function. Label this curve 'Firm 2's best-responsem +X- Output of Firm 2, Units per year Firm 1's best-response 2.) Using the point drawing tool, identify the new Cournot equilibrium. Label this point'e, Carefully follow the instructions above, and only draw the required objects. Relative to a marginal cost of m, when Firm 2's marginal cost changes to m + x, Firm 1's output - and Firm 2's output (2) - Firm 2's best-response Output of Firm 1, Units per year Output of Firm 2, Units per year Firm 1's best-response en 421 P est-responsem+x Firm 2's best-response Output of Firm 1, Units per year 91912 (1) O O decreases increases remains unchanged (2) O O O increases decreases remains unchanged

Answer 1

.

MC= m, 1.) demand funch P= a-Q, then when both have let then ti= (a-9-92-m) q Ti= a-92-m) q-912 i ani (a -92 m) - 24 =o q BR = a-m-92 09 similarly q ₂ BR = a-maq solving two BR, 1 99=92= (a-m , Ang Now let Mcg=mty, then q BRS a-m-X-01 xaxis intercept of BR2 = (a-m-x) yaxis Intercept = (a-m-Y) at New Eqm, q, BR1 & qq BR cuts q2 = amx)-[a-m-92 xloo = 392 4 a-m-2x A. 3 14.2.-(-m-2x), 9 = op - (ayn-au) -3Q-3m - Qat2m+ 4x ha a-mata un proces 9g falls, 6

Now when MC rises, then BR2 shifts inwards parallel

so firm 1 output increases ( option 2)

firm 2 output decreases ( option 2)