Consider two firms facing the demand curve P = 50-5Q, where Q=Q1+Q2. The firms’ cost functions are C1 (Q1) = 20+10Q1 and C2 (Q2) = 10+12Q2.
a. Suppose both firms have entered the industry. What is the joint profit-maximizing level of output? How much will each firm produce? How would your answer change if the firms have not yet entered the industry?
b. What is each firm’s equilibrium output and profit if they behave noncooperatively? Use the Cournot model. Draw the firms’ reaction curves and show the equilibrium.
c. How much should Firm 1 be willing to pay to purchase Firm 2 if collusion is illegal but a takeover is not?
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