5. Suppose that two firms are Cournot competitors. Industry demand is given by P = 200 ...

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5. Suppose that two firms are Cournot competitors.

Industry demand is given by P = 200 – q 1 – q 2 , where q 1 is the output of Firm 1 and q 2 is the output of Firm 2. Both Firm 1 and Firm 2 face constant marginal and average total costs of $20.

a. Solve for the Cournot price, quantity, and firm profits.

b. Firm 1 is considering investing in costly technology that will enable it to reduce its costs to

$15 per unit. How much should Firm 1 be willing to pay if such an investment can guarantee that Firm 2 will not be able to acquire it?

c. How does your answer to

(b) change if Firm 1 knows the technology is available to Firm 2?

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