Q. Firm X is looking to enter one of two potential markets:

Market 1: Cournot market in which 4 firms are currently competing in a Cournot game. If X enters the market, it will be the 5th firm. The inverse demand function is p=10-Q, where Q is the total market quantity. The marginal cost of each firm operating in this market is $2.

Market 2: Perfectly competitive market in which the market demand and supply curves are given by the following. If X enters the market, it will not affect the market supply curve (since it is such a small part of the market).

Q(D)=40-5P

Q(S)=10+2P

If X wants to enter the market with the highest price, which market should it enter?

a. Market 1 has the higher price.

b. Market 2 has the higher price.

c. The two Markets have identical prices.

d. More information is required to determine which market will have the higher price. X will need to know the Marginal Cost firms face in Market 2.