ECON 2300 Lecture Notes - Lecture 12: Best Response, Marginal Revenue, Marginal Cost
6 Feb 2017
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Document Summary
Suppose that at time t the firms are producing outputs (yt1 , yt2 ), which are not necessarily equilibrium outputs. If firm 1 expects that firm 2 is going to continue to keep its output at yt2 . Next period firm 1 would want to choose the profit-maximizing output given that expectation, namely f1(yt2 ). Thus firm 1"s choice in period t + 1 will be given by yt+1 1 = f1(yt2 ). Firm 2 can reason the same way, so firm 2"s choice next period will be yt+1 2 = f2(yt1 ). These equations describe how each firm adjusts its output in the face of the other firm"s choice. Here is the way to interpret the diagram. Start with some operating point (yt1 , yt2 ). Given firm 2"s level of output, firm 1 optimally chooses to produce yt+1 1 = f1(yt2 ) next period.
