2. Suppose your firm has limited capital to invest in new R&D. Two lines of innovation (referred to as projects) have been proposed by managers. Project 1 costs $100,000 up front, but generates $50,000 in additional profits at the end of each of the next 4 years. Project 2 costs $150,000 in upfront costs, generating and additional $75,000 in profits at the end of each of the next three years. Assume the discount rate is 8%. a) What is the net present value of Project 1? b) If your firm can only pursue one of the projects, which should it pursue and why? Explain. c) Suppose that Project 2 results in a patentable innovation, potentially extending the flow of $75,000 in profits. With patent protection the firm would earn 575,000 at the end of each of the next 20 years. What is the net present value of Project 2 with patent protection? Consider 2 airplane manufacturers that compete as Cournot duopolists in the market for commercial aircraft. Arrowing (firm A) has a cost function given by c(q,) = qu, whereas SkyTrain (firm S) has a cost function given by c(qg) = % Qs\". The market demand function for commercial airliners is given by: Q=240-3P where () is the sum of the quantity of planes available for purchase. If we were to solve each firm's profit-maximization problem, treating the other firm's output level as fixed, we would find the following best response (BR) functions: 1 BR,(qs) =q, =119 - E'Is 1 BRs(q,) = q5 = 80 3a a) If the two companies choose the quantities of trips supplied simultaneously, find the Cournot equilibrium quantities supplied for each firm and the equilibrium price. What are each firm's profits earned? b) Suppose that firm A has the opportunity to choose their quantity of trips first, so that they are a Stackelberg leader. Find the Nash Equilibrium to this game and calculate the profits that each firm would receive. c) Compare profits from part (a) and part (b). Would firm A benefit from moving first? Does firm B benefit from moving last? 4. Answer the following, assuming the firms in Question 2 above compete as Bertrand duopolists. a) What would you expect to be the price that would prevail in this market? Who will produce how much for the market? Explain intuitively