# Cournot: Step-by Solution ## 1: Understanding the Cournot Model- **Cournot competition** is model where firms in an oligopoly **quantities (outputs simultaneously. - firm chooses its **assuming the other firm's output is fixed**. - The market price is determined by the **total output** produced by all firms. ## Step 2: Analyzing the Options ### A) Collusive outcome - In a collusive outcome, firms cooperate to maximize **joint profits** (like a cartel). - In Cournot, firms **do not collude**; they act **independently**. ### B) Perfectly competitive outcome - In perfect competition, firms are **price-takers** and output is set where price equals **marginal cost**. - Cournot equilibrium results in **higher prices and lower output** than perfect competition. ### C) Nash equilibrium in quantities - A **Nash equilibrium** occurs when each firm's chosen output is **optimal**, given the output of the rival. - In Cournot, each firm chooses its output to **maximize its own profit**, assuming the other firm's output is fixed. - The result is a **Nash equilibrium in quantities**. ### D) Monopoly output - Monopoly output is the **lowest possible total output** (one firm maximizes profit). - In Cournot, **total output is higher** than monopoly, because both firms produce. ## Step 3: Final Answer The Cournot model leads to: **C) Nash equilibrium in quantities** > **Explanation:** > In the Cournot model, each firm chooses its quantity based on the expectation that the rival's output will not change. This mutual best response leads to a Nash equilibrium in quantities, where no firm can increase profit by unilaterally changing its output. --- **Final Answer:** **C) Nash equilibrium in quantities**