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Question 1: There are three firms in a market. They produce a homogeneous product and engage in Cournot competition. Firm 1 produces at a marginal
Question 1: There are three firms in a market. They produce a homogeneous product and engage in Cournot competition. Firm 1 produces at a marginal and average cost of 3, firm 2 produces at a marginal and average cost of 6, and firm 3 produces at a marginal and average cost of 6. There are no fixed costs for all firms. The inverse demand function is given by p=21-0, where () is the aggregate quantity produced by all three firms in the market. a) Verify that in the equilibrium: firm 1 produces a quantity of 6, firm 2 produces a quantity of 3, and firm 3 produces a quantity of 3. Find the corresponding profits of each firm at these guantities. [4 marks] Consider a merger between firm 2 and firm 3: The merged firm produces at a marginal and average cost of 6, and firm 1 produces at a marginal and average cost of 3. The merged firm and firm 1 continue to engage in Cournot competition. HDW much does each firm produce after the merger? [6 marks]
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