Posted by **jenny** on Sunday, September 7, 2008 at 11:06pm.

Consider a Cournot duopoly, composed of firms A & B ¡V which produce identical products and face identical costs.

(a) Draw a set of reaction functions in one diagram for this Cournot duopoly.

(b) Label the monopoly outputs that would be produced by firms A & B.

(c) Label the Cournot equilibrium set of outputs.

(d) If the fixed costs of firm A go up ¡V what happens to its reaction curve?

(e) In a new diagram, with identical reaction functions to those used in parts (a) ¡V (c), if the marginal cost for firm A, at every level of output, increases, demonstrate what will happen to its reaction curve. How will the Cournot equilibrium outputs of each firm change?

(f) In a new diagram, with identical reaction functions to those used in parts (a) ¡V (c), if the demand curves for firms A & B shift inwards, demonstrate what will happen to their reaction curves. How will the Cournot equilibrium outputs of each firm change?

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