6–3. Genesee and Natural Light are the two sole competitors in the ultra low-end beer market in the Rochester metro area. Both firms have marginal costs of 0 and fixed costs of 200.

The industry demand curve is P = 100 − 0.1Q, where Q = Q1 + Q2.

a. Assume the firms compete on quantity (Cournot competition). What is the equilibrium price and total production in the market? How much profit will each firm make?

b. If firms compete on price (rather than quantity), is the answer in part

(a) a Nash equilibrium? Explain.

c. Now assume that Genesee acquires Natural Light’s Rochester operations and has a total regional monopoly on ultra low-end beer. What price will they charge? How much profit will the combined firm make? Is this more or less than in part (a)?

Explain briefly why you found what you did.

d. Now suppose that neither firm has entered the Rochester market and that it costs

$10,000 to build a plant. Suppose that Genesee spends $10,000 to build a plant and starts producing 400 units. Will Natural Light want to spend $10,000 to enter the market? Show why. Assume that there is only one production period to consider.