There are two firms in an industry, engaged in Cournot competition.

QUESTION

There are two firms in an industry, engaged in Cournot competition. The firms compete repeatedlyin successive time periods. Occasionally, one of the firms is required to produce a certain amount(due to production constraints). This amount is known to both firms before the other firm has thechance to choose its output. At other times, the firms are unconstrained, and announce theirproduction levels simultaneously. You can assume that both firms behave rationally at all times.Consider the following data when one firm’s output is known ahead of the other’s choice:Firm 1 is required to produce 10 units. Following this, Firm 2 produced 5 units.Firm 1 is required to produce 12 units. Following this, Firm 2 produced 4 units.Firm 2 is required to produce 8 units. Following this, Firm 1 produced 10 units.Firm 2 is required to produce 16 units. Following this, Firm 1 produced 8 units.(a) What will be the Nash equilibrium in a simultaneous move Cournot game? Assume that firms haveno constraints on production.(b) Depict this Nash equilibrium in a figure, along with the firms’ reaction functions. Label the figureclearly.

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