An industry consists of two firms with identical cost functions, C(qi) = 10qi. Inverse

market demand is given by P = 580.5Q, where Q = q1+q2 is total industry quantity.

Suppose the two firms try to collude and jointly produce the monopoly output.

How much would each firm produce if it made half the monopoly quantity?

How much could firm 1 gain in profit if it reneges on producing half the monopoly

quantity and maximizes its profits given that its competitor is still making half

of monopoly output?

Suppose the two firms try for an agreement where they each make 32 units of

output. Show neither firm has an incentive to cheat on this agreement.

Characterize this solution graphically as the intersection of the firms' best re-

sponse functions