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Industrial Organization- BCOR 310

SPRING 2015
Professor: Brahim Guizani

HOMEWORK Unit 5: Cournot and Bertrand Model

Problem I

Problem 2
The inverse market demand for fax paper is given by P = 400 2Q. There are two
rms who produce fax paper. Each rm has a unit cost of production equal to 40,
and they compete in the market in quantities. That is, they can choose any quantity
to produce, and they make their quantity choices simultaneously.
a. Show how to derive the Cournot-Nash equilibrium to this game. What are rms
prots in equilibrium?

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b. What s the monopoly output, i.e., the one that maximizes total industry
prot? Why isnt producing one-half the monopoly output a Nash equilibrium
outcome?

Problem 3
Return to Problem 6, but suppose now that rm 1 has a cost advantage. Its unit cost
is constant and equal to 25 whereas rm 2 still has a unit cost of 40. What is the
Cournot outcome now? What are the prots for each rm?

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Problem 4
Suppose rm 1 and rm 2 each produce the same product and face a market
demand curve described by Q= 5000 200P. Firm1 has a unit cost of production c1
equal to 6 whereas rm 2 has a higher unit cost of production c2 equal to 10.
a. What is the Bertrand-Nash equilibrium outcome?

b. What are the prots of each rm?

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c. Is this outcome efcient?

Problem 5
Suppose that market demand for golf balls is described by Q= 90 3P, where Q is
measured in kilos of balls. There are two rms that supply the market. Firm 1 can
produce a kilo of balls at a constant unit cost of
$15 whereas rm 2 has a
constant unit cost equal to $10.
a. Suppose the rms compete in quantities. How much does each rm sell in a
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Cournot equilibrium? What is the market price and what are the rms prots?

b. Suppose the rms compete in price. How much does each rm sell in a Bertrand
equilibrium? What is market price and what are the rms prots?

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