Consider two firms facing the demand curve P=10-Q, where Q=Q1+Q2 .The firm's cost function are C1(Q1)=4+2Q1,C2Q2=3+3Q2.
a) Suppose both firm have 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 non cooperative? 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 firm2 if collusion is illegal but the takeover is not?