Intermediate economics questions featuring choice and response function as well as Nash equilibrium. Knowledge about intermediate college level economics required! Please answer the questions in the attached document in a separate paper and send me the pictures of your answers.

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Homework 12

Print this page out and use the space below and the back to write out and clearly indicate your

answers. Do not use this sheet as scrap paper, but use it to neatly present your work. Consider an

asymmetric Cournot duopoly game between competing hamburger stands, where the two firms

have different cost functions. McWendy’s chooses to produce 𝑞 hamburgers at a cost of

𝑐 𝑞

𝑞 . Donald’s chooses to produce 𝑞 hamburgers at a cost of 𝑐 𝑞

3𝑞 . Since the

hamburgers are alike (homogenous goods), the market price for hamburgers is given by 𝑝

. Show your work in the answers below.

23

1) Calculate McWendy’s best response function to Donald’s choice of 𝑞 . 1pt

2) Calculate Donald’s best response function to McWendy’s choice of 𝑞 . 1pt

3) Sketch the two best response functions in the graph below. 1pt

4) Calculate the Cournot-Nash equilibrium quantities, and indicate these quantities on the graph

in part 3). Which firm produces more? Calculate McWendy’s profit and Donald’s profit.

Explain your answer intuitively. 4pts

5) Suppose that McWendy’s and Donald’s both agreed to decrease their burger production by

100 burgers each from the Cournot-Nash equilibrium outcome in part 4). Calculate McWendy’s

and Donald’s new profit levels. 1pt

6) Suppose that Donald’s produced the amount in part 5). How much would McWendy’s

produce in order to maximize profit? If McWendy’s produced this amount while Donald’s

continue to produce the amount in part 5), what would McWendy’s profit be? 2pts

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