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Cournot and Sequential Choice

Firm A has developed a new product and now must decide whether to build enough capacity to produce 1 or 2 units of the new product. It expects cost of production to be CA(q) = 8qa + qa2. Firm A estimates demand will be Q = 10 – .5P (where Q = qa + qb). It also expects a rival firm B will soon develop a copy of the product and build enough capacity to produce 1 or 2 units as well. It expects B to have the same cost as it does and that B will play Cournot. Represent this situation as an extensive-form game (sequential choice) and figure out what quantity Firm A and B will produce.

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Category: Sample Questions