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IAI Oct 2006 Q19

  • Thread starter Srijana Raghunath
  • Start date
This was covered in my Actuarial Econs notes.

rivals produce fixed quantity: Cournot model
• firms chose best output for remainder of the market
• profit will be less than under a cartel, but more than under perfect competition
 
What would be the answer for the above question?
 
Hi Srijana, I believe the textbook 'Economics' 10th Ed, used currently for the IFoA's CB2 syllabus largely covers the Cournot model only as a duopoly, so I wouldn't really expect to see this question in the IFoA exams now. I'm not sure about the current Core Reading for the IAI exams.

However, if we ignore that the question is more general for a moment, and instead assume that the question assumes the market is a duopoly.

Building on what Calm has said, under the Cournot model, a firm assumes the other produces a certain quantity. This means that the demand curve for an individual firm has the same gradient as the industry demand curve.

(Drawing the demand curve on a graph, an individual firm's demand curve would be to the left of the industry demand curve by the quantity produced by the other firm).

So, here, given the demand curve, I would expect that if the individual firm increased the quantity it produced by 1, the price would fall by 2 ie option A.
 
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