The state has announced its plans to license two firms to serve a market whose demand curve is given by P 100 Q. The technology is such that each can produce any given level of output at zero cost, but once each firm’s output is chosen, it cannot be altered.

a. What is the most you would be willing to pay for one of these licenses if you knew you would be able to choose your level of output first (assuming your choice was observable by the rival firm)?

b. How much would your rival be willing to pay for the right to choose second?

*11. Firm 1 and firm 2 are competing for a cable television franchise. The present value of the net revenues generated by the franchise is equal to R. Each firm’s probability of winning the franchise is given by its proportion of the total spent by the two firms on lobbying the local government committee that awards the franchise. That is, if I1 and I2 represent the lobbying expenditures of firms 1 and 2, respectively, then firm 1’s probability of winning is given by I1(I1  I2), while firm 2’s probability of winning is I2(I1 

I2). If each firm assumes that the other firm’s spending is independent of its own, what is the equilibrium level of spending for each firm?