The inverse demand for designer blankets is given by P = 40 - 0.01Q, where P is the price per blanket and Q is the total number of blankets brought to market. Two shops in the market supply specialty blankets. Shop 1's cost function is given by C₁ = 0.02q₁², where q₁ is the number it brings to market. Shop 2's cost function is given by C₂ = 0.02q₂², where q₂ is the number it brings to market. Given that the two shops compete by setting output (Cournot), the equilibrium market price is $____.

Question

Quizplus · Accepted Answer

In a Cournot competition, each firm chooses its output to maximize profit given the output of the other firm. The reaction functions are derived from the profit maximization conditions. Solving these reaction functions simultaneously gives the equilibrium outputs, which can be used to find the equilibrium market price. The correct equilibrium price is $28.58.

The Inverse Demand for Designer Blankets Is Given by P