E would the results you found in parts c and d be

e. Would the results you found in parts (c) and (d) be likely to hold if Linus let it be known
that his pumpkins were the most orange in town, and Lucy let it be known that hers were
the tastiest? Explain.
Problem 5: GLS 11.5. Suppose that two firms are Cournot competitors. Industry demand is given by P
200 – q
1
– q
2
, where q
1
is the output of Firm 1 and q
2
is the output of Firm 2. Both Firm 1 and
Firm 2 face constant marginal and average total costs of $20.
Quantity produced by Firm 1: q
1
= 90 - 0.5q
2
= 90 - 0.5(90 - 0.5q
1
) = 45 + 0.25q
1
0.75q
1
= 45
q
1
= 60
Quantity produced by Firm 2: q
2
= 90 - 0.5q
1
= 90 - 0.5(60) = 60
a. Solve for the Cournot price, quantity, and firm profits.
=
b. Firm 1 is considering investing in costly technology that will enable it to reduce its costs
to $15 per unit. How much should Firm 1 be willing to pay if such an investment can
guarantee that Firm 2 will not be able to acquire it?

Microeconomic Theory, ECON 301 Problem Set 5, Page 4
π
π
c. How does your answer to (b) change if Firm 1 knows the technology is available to Firm
2?