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51 1. Chipco and Wizmo are the only firms that provide computer chips to cellphone manufacturers. Demand for these chips is P=210-.05Q, and costs are

51

1. Chipco and Wizmo are the only firms that provide computer chips to cellphone manufacturers. Demand for these chips is P=210-.05Q, and costs are MC=ATC=50 for both firms. Suppose that these chips are homogeneous and quantities are chosen before price. a. Assuming they compete in Cournot competition, what are the reaction functions of the firms? Show on a graph, including the intercepts. b. Calculate the quantities for the two firms, and show on the graph. What is the price? What are profits for the two firms? c. Suppose that Wizmo finds a new process to make these chips, and as such their costs fall to MCW=ATCW=$30. Find the new quantities, price, and profits. Show the effect on your reaction functions graph.

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