duopoly doubt

[ritu]

hi
in cournot we say that outcome when best response functions intersect is nt pareto efficient....how can we have a situation where there is a tamgency btwn iso profit curvrs so that its pareto efficient..???does this require collusive behaviour on part of both firms so they both produce lower output nd higher price is attained?!??

[aditi5000]

Yes exactly, from the firms point of view the pareto efficient situation is collusive oligopoly where output is highly restricted and prices are high. but this is not a stable equilibrium... even better than that is a monopoly situation - no competition!

[ritu]

ok...thanx aditi...
there is a question in dse 2004
on cournot...pls look into that question...there is a part where a firm is makong initial investment and we have to find optimal c...i m unable to do that part

[aditi5000]

maximise cournot profit - (9c square - 13c)/18 meaning
maximise wrt c
P(c) * q1(c) - c * q1(c) - [(9c2 - 13c)/18]

put q1 = (3-4c)/6  , p = (3+2c)/6 as its given in the question that the firm anticipated cournot quantity competition

You'll get c=1/2