Table 17-7.The table shows the demand schedule for a particular product.

-Refer to Table 17-7.Suppose that the marginal cost to produce this product is constant at $1 per unit and that the fixed cost of producing this product is $10.If the market is served by two duopolists who each,acting in their own self-interest,choose the Nash equilibrium level of production,how much profit will each firm earn?

Question

Table 17-7.The table shows the demand schedule for a particular product.
 
-Refer to Table 17-7.Suppose that the marginal cost to produce this product is constant at $1 per unit and that the fixed cost of producing this product is $10.If the market is served by two duopolists who each,acting in their own self-interest,choose the Nash equilibrium level of production,how much profit will each firm earn?

Quizplus · Accepted Answer

To find the Nash equilibrium level of production, we need to find where the two firms' best responses intersect. We can do this by finding each firm's profit at each possible level of production and seeing where they would have no incentive to change their production level.
Using the given demand schedule and a constant marginal cost of $1, we can calculate the profit for each level of production for both firms:

For Firm A:
- If Firm B produces 0 units: profit = (price - marginal cost) x quantity - fixed cost = (25 - 1) x 20 - 10 = $470
- If Firm B produces 10 units: profit = (price - marginal cost) x quantity - fixed cost = (20 - 1) x 10 - 10 = $190
- If Firm B produces 20 units: profit = (price - marginal cost) x quantity - fixed cost = (15 - 1) x 0 - 10 = -$10

For Firm B:
- If Firm A produces 0 units: profit = (price - marginal cost) x quantity - fixed cost = (25 - 1) x 20 - 10 = $470
- If Firm A produces 10 units: profit = (price - marginal cost) x quantity - fixed cost = (20 - 1) x 10 - 10 = $190
- If Firm A produces 20 units: profit = (price - marginal cost) x quantity - fixed cost = (15 - 1) x 0 - 10 = -$10

The Nash equilibrium occurs where both firms have no incentive to change their production level, which is at a production level of 10 units each. At this level, each firm earns a profit of $190, so the total profit for the duopoly is $380. Since there are two firms, each earns half of the total profit, or $190. Therefore, the answer is C, $35 profit for each firm after subtracting the fixed production cost of $10.