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28 January, 22:53

Why is the Cournot equilibrium stable? (i. e. Why don't forms have any incentive to change their output levels once in equilibrium) 1) At the Cournot equilibrium, firms have no incentive too change their output levels because?2) Even if they can't collude, why don't firms set their output at the joint profit-maximizing levels? (i. e. the levels they would have chosen had they colluded)

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  1. 28 January, 23:47
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    1. Each firm is manufacturing the number of products that maximizes its profit given what its competitors are producing/manufacturing.

    2. Each firm would have an incentive to increase output to gain profits at the expense of the other firm.

    Explanation:

    1) The cournot equilibrium is stable because firms have no equilibrium to change their output levels when they are in equilibrium because each firm is producing or manufacturing the number of products that maximizes its profit given what its competitors are producing. At the Cournot equilibrium, firms have no incentive to change their output levels because each firm is producing the amount that maximizes its profit given what its competitors are producing.

    2) When firms act together to hold down industry output, charge a higher price, and divide up the profit among themselves in this way to reduce output and keep prices high, it is called collusion. When firms can't collude and still don't set their at the joint profit-maximizing because each firm would have an incentive to increase output to increase profits at the expense of the other firm. Firms do not set their outputs at the joint profit-maximizing levels because each firm would have an incentive to increase output to increase profits at the expense of the other firm. Also, when competing with respect to price, they don't raise prices to the level that maximizes joint profits because a firm would lose all of their customers or potential customers if they raise their price.
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