ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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2. Cournot competition
Consider a town in which only two residents, Andrew and Beth, own wells that produce water safe for drinking. Andrew and Beth can pump and sell as
much water as they want at no cost. Assume that outside water cannot be transported into the town for sale. The following questions will walk you
through how to compute the Cournot quantity competition outcome for these duopolists.
Consider the market demand curve for water and the marginal cost for collecting water on the following graph. Assume Andrew believes that Beth
is going to collect 4 gallons of water to sell.
On the graph, use the purple points (diamond symbols) to plot the demand curve (D₁) Andrew faces given Beth's water collection; then use the grey
points (star symbol) to plot the marginal revenue curve (MR₁) Andrew faces. Finally, use the black point (plus symbol) to indicate the profit-
maximizing price and quantity (Profit Max 1) in this case.
Note: Dashed drop lines will automatically extend to both axes.
PRICE (Dollars per gallon)
6.00
5.50 +
5.00
4.50 +
4.00
3.50
3.00
2.50 +
2.00
1.50
1.00
0.50 +
0
0
Market Demand
MC
1
+
2
3 4 5 6 7 8
9
QUANTITY (Gallons of water)
10
11
12
$5$
D₁
MR₁
Profit Max 1
?
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Transcribed Image Text:2. Cournot competition Consider a town in which only two residents, Andrew and Beth, own wells that produce water safe for drinking. Andrew and Beth can pump and sell as much water as they want at no cost. Assume that outside water cannot be transported into the town for sale. The following questions will walk you through how to compute the Cournot quantity competition outcome for these duopolists. Consider the market demand curve for water and the marginal cost for collecting water on the following graph. Assume Andrew believes that Beth is going to collect 4 gallons of water to sell. On the graph, use the purple points (diamond symbols) to plot the demand curve (D₁) Andrew faces given Beth's water collection; then use the grey points (star symbol) to plot the marginal revenue curve (MR₁) Andrew faces. Finally, use the black point (plus symbol) to indicate the profit- maximizing price and quantity (Profit Max 1) in this case. Note: Dashed drop lines will automatically extend to both axes. PRICE (Dollars per gallon) 6.00 5.50 + 5.00 4.50 + 4.00 3.50 3.00 2.50 + 2.00 1.50 1.00 0.50 + 0 0 Market Demand MC 1 + 2 3 4 5 6 7 8 9 QUANTITY (Gallons of water) 10 11 12 $5$ D₁ MR₁ Profit Max 1 ?
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