Firms 1 and 2 both produce gizmos, but firm 1 does it at a lower cost than firm 2. Firm 1 has a constant marginal cost of $27, and firm 2 has a constant marginal cost of $9. The demand for gizmos is p=90-3y where y is aggregate output.

a. Suppose that the firms choose quantities. Find both best response functions. Remember, marginal costs are

different, so the best response functions will not be symmetric. Find the Cournot equilibrium quantities

i.e production level by each firm, market price and profits.

b. Suppose that the firms choose prices instead of quantities and that prices must be announced in dollars and cents.

(That is, $15.71, and $39.00 are permissible prices, but $45.975 is not.) What are the Bertrand equilibrium prices?

How much does each firm earn in the Bertrand equilibrium?

c. CEO of firm 1 has decided to take over firm 2 in order to exploit the economies of scale and reduce the marginal cost. Assume the new marginal cost of post merger firm is the simple average of marginal costs of firms before merger. What will the optimal outcome quantity, price, and profit be? Would you recommend the CEO to go with this decision? Why?