Drywall manufacturing is heavily concentrated and typically faces little foreign competition. During construction booms, however, production can fall short of growing demand for drywall, thus forcing imports to meet domestic needs.

Suppose drywall production is concentrated in two companies: American Gypsum and California-Atlantic. The annual demand for drywall (in thousands of square feet) has been estimated as () = 2,400,000 10,000, where is the price per 1,000 square feet of drywall. Both firms have a marginal cost of production of $30 per 1,000 square feet.

a) Based on the description of the industry above, what is the most appropriate model to use to represent this market? Why?

b) Given your choice of model in (a), find the equilibrium price and quantity in the market. After striking an exclusive deal to obtain gypsum from a nearby mine, American Gypsum's marginal cost of production of drywall decreases to $22.50 per 1,000 square feet.

c) By how much should American Gypsum change its production, and how should California-Atlantic react? Find the new market price of drywall.