Economics Game Theory:
A Duopoly game: Cournot competition:
Consider the Cournot duopolists firm 1 and firm 2. They produce homogeneous products and simultaneously choose quantities q1 and q2, respectively. Each firm is trying to maximize his own profit.
The market demand is given by p=14-Q, where Q= q1+q2 is the total quantity produced in the market.
The marginal production cost of each firm is 2.
a. From firm 1’s profit maximization, derive firm 1’s best response function.
b. From firm 2’s profit maximization, derive firm 2’s best response function.
c. Find the NE quantities and the corresponding profits of each firm.