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PS9 updated - Rice Un iv e rsity E C O N 211 Fall 2007...

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1 Rice University E C O N 211, Fall 2007 Problem Set 9 D u e on T uesday/Wednesday, November 20 /21 1. (40 pts.) Suppose that, in the chocolate candy industry, there are only two firms: Hershey and M&M. Each producer produces identical candy bars and has a constant marginal cost (MC), $20. The demand for candy bars is represented by 200 P Q , where P is the price and Q is the industry output level. a) If these firms form a cartel and act as a monopolist in the market, their joint marginal revenue will be 200 2 MR Q . What is their combined price and the joint profits? b) Now suppose each firm chooses the profit maximizing output level assuming that its opponent will continue to produce the current level of output (Cournot Oligopoly). The optimal choice of output level ( h q ) by Hershey when M&M is currently producing m q units of candy bar is given by 90 2 m h q q . Similarly it is 90 2 h m q q for M&M. Solve for the price, the equilibrium output levels of each firm, and their profits.
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