Problem 1 (Cournot). London, Toronto and Waterloo are three separate markets. The average income (denoted as Incm ) is 80 thousands in all cities, where m= London, Toronto, Waterloo. The population (denoted as Popm ) is 2 million in London, 5 million in Toronto and 1 million in Waterloo. In each city, the demand for carb-free rice can be described by Pm=ambmQm, where Qm is the total quantity produced by all firms in market m,am= Inc m and bm=0+1Popm. The market for a new carbohydrate-free strand of rice is served by three firms, AsiaRice, Ben's Rice, and CountryRice (or A, B, and C). These firms are engaged in (simultaneous) Cournot competition in each market. A and B both operate in London and Toronto, while C operates in Toronto and Waterloo. All three firms have a linear total cost function described by Ci(qi)=ciqi, where qi is the quantity produced by firm i and i{A,B,C}. Note that the marginal cost parameters cA,cB,cC may differ. A consulting firm collected data in Toronto on firms A,B and C:PToronto= 7/2,qA=1/10,qB=1/2,qC=3/10, and market-level price and quantity data in London and Waterloo: PLondon=4,QLondon=2,PWaterloo=5,QWaterloo=3. 1. Estimate demand parameters (,0,1). 2. What is the best response function of AsiaRice in Toronto? (Hint: qA as a function of qB,qC and the cost parameters.) 3. Estimate the cost parameters cA,cB,cC. 4. Suppose AsiaRice and Ben's Rice propose a merger. Denote this new firm by N. Suppose cN=min{cA,cB}. Calculate the post-merger quantity produced by firm N in each city. 5. Compare total surplus (that is, consumer surplus plus total firm profit) in Toronto before and after the merger. 6. Compare total surplus (that is, consumer surplus plus total firm profit) in London before and after the merger. 7. Suppose that AsiaRice and Ben's Rice argue that the new firm will be more efficient cN=(1)min{cA,cB}, where [0,1]. To make consumers in London better off after the merger, what is the minimum ? 8. To make social welfare in London better off after the merger, what is the minimum ? Problem 1 (Cournot). London, Toronto and Waterloo are three separate markets. The average income (denoted as Incm ) is 80 thousands in all cities, where m= London, Toronto, Waterloo. The population (denoted as Popm ) is 2 million in London, 5 million in Toronto and 1 million in Waterloo. In each city, the demand for carb-free rice can be described by Pm=ambmQm, where Qm is the total quantity produced by all firms in market m,am= Inc m and bm=0+1Popm. The market for a new carbohydrate-free strand of rice is served by three firms, AsiaRice, Ben's Rice, and CountryRice (or A, B, and C). These firms are engaged in (simultaneous) Cournot competition in each market. A and B both operate in London and Toronto, while C operates in Toronto and Waterloo. All three firms have a linear total cost function described by Ci(qi)=ciqi, where qi is the quantity produced by firm i and i{A,B,C}. Note that the marginal cost parameters cA,cB,cC may differ. A consulting firm collected data in Toronto on firms A,B and C:PToronto= 7/2,qA=1/10,qB=1/2,qC=3/10, and market-level price and quantity data in London and Waterloo: PLondon=4,QLondon=2,PWaterloo=5,QWaterloo=3. 1. Estimate demand parameters (,0,1). 2. What is the best response function of AsiaRice in Toronto? (Hint: qA as a function of qB,qC and the cost parameters.) 3. Estimate the cost parameters cA,cB,cC. 4. Suppose AsiaRice and Ben's Rice propose a merger. Denote this new firm by N. Suppose cN=min{cA,cB}. Calculate the post-merger quantity produced by firm N in each city. 5. Compare total surplus (that is, consumer surplus plus total firm profit) in Toronto before and after the merger. 6. Compare total surplus (that is, consumer surplus plus total firm profit) in London before and after the merger. 7. Suppose that AsiaRice and Ben's Rice argue that the new firm will be more efficient cN=(1)min{cA,cB}, where [0,1]. To make consumers in London better off after the merger, what is the minimum ? 8. To make social welfare in London better off after the merger, what is the minimum