An industry consists of two firms with identical demand function ???? = 100 − ????????, where ???????? = ????1 + ????2. Both firms have identical cost ???????? = 40????????, where ???? = 1,2. Both firms pay attention to the behaviour of their competitor in determining the output produced, and both firms make their decision simultaneously (no one moves first).

(a) If both firms decide to compete in determining their outputs, find the profit maximizing q and P and calculate the profit of each firm!

(b) If both firms collude and form a cartel and act as a monopolist, find the profit maximizing q and P and calculate the profit of each firm!

(c) In one graph, show and compare the above competitive and collusive solutions.

(d) In real life, which solution usually prevails? Compete or collude? Explain!