Answer to Question #285254 in Microeconomics for Hazal 13 3.14

Question

In a Nash cournot equilibrium, does an oligopolistic firm produce at less than full capacity, full capacity or more than full capacity? Explain with graphs

Answer 1

Nash equilibrium is the group of actions or strategies used by firms to produce full capacity if given an opportunity to do what the competitors are doing. The Cournot concept of oligopolistic indicates that each firm aims to do its best if allowed to work on the competitors’ activities. Likewise, the competitors believe they can do best if given firm’s actions. The Cournot model states that oligopolistic firms produce homogenous products. Every firm considers the competitors’ output as fixed and every firm decides concurrently on the quantity to produce.

The first reaction curve indicates the quantity that will be produced as a much as it believes firm 2 will generate. The second reaction curve shows the output of firm 2 contemplating what firm 1 will produce. Within the Cournot model, the two firms correctly assume the competitor’s output and focuses on maximizing their profits. Thus, neither firm 1 nor firm 2 will shift from this equilibrium.