a) Firms A and B are Cournot duopolists producing a homogeneous good.The inverse market demand isgiven byP = 100-Q, where P isthemarket price and Q is thetotalquantity demanded. Eachfirm has marginal cost equal to40and there are no fixed costs.

(i)[20marks]Calculate thetotal industry outputin this market. Derive also the market price,the totalprofitof the two firmsandtheconsumer surplus.

(ii)[10marks]Suppose the two firms propose to merge to become a monopoly.Calculate thetotal industry output after the merger. Derive also the market price, profit and consumer surplus after the merger. Explain intuitivelyanychangesinthese variablesifthe merger occurs.

(iii)[5marks] A regulatorfor this market aims to maximise social welfare. Should the regulator permit the merger?Explain why or why not.

(b)[15marks] Consider a market where there is a single incumbent and a single potential entrant.The product is homogeneousand each firm hasconstant marginal cost of c. To enter the market, the potential entrant would have to incur a one-time cost of F.

Resolve the following paradox: If the post-entry game is a Bertrand duopoly, then neither firm will make profits. If the post-entry game is a Cournot duopoly, thenbothfirmswill make profits. The incumbent, however, would prefer to be in a situation where the post-entrygameis Bertrand rather than Cournot. Why?