monopolist can produce at constant average (and marginal) costs of AC = MC = 5. The firm faces a market demand curve given by Q = 53 - P

1. Calculate the profit maximizing price quantity combination for this monopolist.

2. Suppose a second firm enters the market. Let be output of firm 1 and the output of firm 2. Market demand now is given by . Assuming firm 2 has the same costs as firm 1, and the two firms operate as a cartel, calculate the profits of firm 1 and firm 2 as functions of and .

3. Suppose (after Cournot) each of these two firms chooses its level of output so as to maximize profits on the assumption that the other`s output is fixed. Calculate each firm`s reaction function which expresses the desired output of one firm as a function of the others output.

4. On the assumption in part (c), what is the only level for and with which both firms will be satisfied (what, combination satisfies both reaction curves).

5. With and at the equilibrium level specified in part (d), what will be the market price, the profits for each firm and the total profits earned?

aestion 3 (25 Points, 5 points each) monopolist can produce at constant average (and marginal) costs of AC = MC = 5. The fir ces a market demand curve given by Q = 53 - P a) Calculate the profit maximizing price quantity combination for this monopolist. b) Suppose a second firm enters the market. Let 9. be output of firm 1 and 42 the outpu of firm 2. Market demand now is given by 9, +q2 = 53 - P. Assuming firm 2 has the same costs as firm 1, and the two firms operate as a cartel, calculate the profits of firm 1 and firm 2 as functions of 9 and 92. c) Suppose (after Cournot) each of these two firms chooses its level of output so as to maximize profits on the assumption that the other's output is fixed. Calculate each firm's "reaction function which expresses the desired output of one firm as a function of the other's output. d) On the assumption in part (c), what is the only level for 91 and 92 with which both firms will be satisfied (what 91, 92 combination satisfies both reaction curves). e) With 9, and 42 at the equilibrium level specified in part (d), what will be the market price, the profits for each firm and the total profits earned