Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Figure 1.1 
Now that B has entered the market, A must reconsider his 
position. Under the assumption that B will continue to produce AH 
units, the best that A can do is to produce ½ of (OB
—AH) i.e. OF 
units (Panel B). He reduces his output from OA to OF units. Total 
supply then OF + AH = OG and the price per unit is OM. Total 
profit now increases to OGRM of which A's share is OFTM and B's 
share is FGRT. Now that A has surprised B by reducing his 
output, B must reconsider his position. Assuming that A will hold 
his output constant, the best B can do to produce ½ of (OB
—OF) 
i.e. ½ FB. Thus, to A's surprise, B increases its output. Then A 
must reconsider producing ½ of (OB
—B's output). This process 
goes on till a total OE units is produced selling for OL price per 
unit. Firm A produces OS units and B produces SE units. 
Equilibrium is reached wh
en output is ⅔ of OB. Had A and B 
joined together, each would have produced ½ of OA and earned 
maximum total profits to OAPC. They could have shared them 
equally, each getting OVCW in profit. Actually, each earns OSZL 
only. Therefore, the result of competition is to lower price and 
profits but output is greater than what would be in a monopoly. In 
other world consumers are better off because of competition. But 
consumers are worse off than what would have been their 
condition under perfect competition. Had there been perfect 
competition, producers would have produced OB output and price 
would have been zero. Since cost is zero, therefore, MC is also 
zero. MC = MR at OB output. In short, Cournot's solution results in 
output which is ⅔ of that under perfect competition and price 
w
hich is ⅔ of the monopoly price (OL is ⅔ of OC). 
Reaction curve: But if B sells the output indicated by point 
1, A will move to point 2 on his reaction curve. The move to point 
2 by A calls for a move by B to point 3 on R
B
R
B
and so on. As the 
adjustments continue to be made, the firms approach the point of