1. The market for laser printer has a demand curve given by P=1400-2Q, where P is industry price and Q is industry quantity. Currently HP and EPSON are the only two firms in this market. Each firm has a constant marginal cost of production equal to 200 and there are no fixed costs.

i). Assume that the two firms collude where each produces half of the total output. What is the equilibrium market price, each firms equilibrium quantity, and the combined profits of the two firms?

ii). Same question as in i), except now rather than colluding, assume that the two firms act as Cournot competitors.

iii). Now suppose a third firm, call it COMPAQ, enters the market. This firm also has a constant marginal cost of production equal to 200 and no fixed costs. Assuming again Cournot competition, derive the equilibrium market price, each firms equilibrium quantity, and the combined profits of the three firms.

Suppose that COMPAQ and EPSON are considering merging and forming a new firm called COMSON. The CEOs of the two firms hire you as a consultant to make a recommendation concerning whether they should merge. In answering iv), assume a merged firm would have a constant marginal cost of production equal to 200 and no fixed costs.

iv). Assuming that after merging COMSON would engage in Cournot competition with HP, what is your recommendation?