The inverse market demand curve for paper is given by P=400-2Q. There are two firms who produce fax paper. Each firm has unit cost of production equal to c=40, and they compete in the market quan-tities. That is, they can choose any quantity to produce, and they make the quantity choices simulta-neously.
a. Show how to derive the Cournot Nash equilibrium to this game. What are the firm's profits in equilibrium?
b. What is the monopoly output, that is the one that maximizes total industry profit? Why isn't pro-ducing one half the monopoly output a Nash equilibrium outcome? Explain and show why
c. Suppose now that firm 1 has a cost advantage. Its unit cost is constant and equal to c=25 whereas firm 2 has the higher unit cost of c=40. What is the Cournot outcome now? What are the firm's profits?