2. Consider an industry with 10 companies selling homogeneous products. Production costs are given by Ci(qi) = 10qi (for i = 1, ..., 10) and the market demand function is: P = 120 - Q Where P is the market price and @ is the total quantity sold. Firms compete in quantities. (a) Find the equilibrium quantities, prices and profits. [10 marks] (b) The 10 firms in this market try to form a cartel on the monopoly outcome. They would like to engage in collusion by acting as a monopolist (i.e. maximizing total industry profits), and sharing the profits equally between them. In order to sustain the monopoly outcome as a cartel, the firms play the following non-forgiving trigger strategy: play cooperation (i.e. monopoly outcome) in the current period so long as the other firm has cooperated in every previous period and play the Cournot Nash equilibrium if there has ever been a deviation from the monopoly outcome. The firms in this market have an adjusted discount factor Rp = 0.73. Show that a cartel on the monopoly outcome cannot be sustained. [10 marks] (c) Suppose that firms 8, 9 and 10 merge, bringing the total number of firms in this industry to 8. Compute the post-merger prices, quantities and profits [5 marks] (d) Show that the merger is detrimental to the merging firms. What features of our model could explain this result? [5 marks] (e) Show that a cartel on the monopoly outcome can now be sustained by the 8 firms in the post-merger industry? [5 marks] (f) Using your answers in parts (b) and (e), comment on the impact of horizontal mergers on the firms' ability to form a cartel. [7 marks] (g) Compute the total per-period efficiency loss due to the merger of firms 8, 9 and 10, and the subsequent formation of the 8-firm cartel. [8 marks]