1. There are two competing firms in a market with inverse market demand P = 130 2Q, where P is price and Q is market demand. Each firm has a constant marginal cost of $10.

a) Assume both firms compete as Cournot duopolists. What is the market price and market output? How much profit does each firm make? (3 marks)

b) If the firms instead behave as Stackelberg duopolists, find the profit maximising output for each firm and the new market price. What are the new profits earned by each firm? Remember to identify which firm is the leader. (2 marks)

2. An existing firm offers to supply one unit of a good to a potential buyer by writing a contract in period 1 for delivery in period 2. The contract specifies a price of $210 and a breach of contract fee of $150. The buyer would be willing to pay $330 and the existing firm has a marginal cost of $120. A potential entrant firm has costs uniformly distributed and competes in Bertrand competition with the existing firm if entry occurs. It is known that the entrants costs are less than or equal to $240. How much extra profit would the entrant earn if there were no contract in place between the existing firm and the buyer? (5 marks)