Question 3 Firm 1 and Firm 2 are both planning to invest in carbon ber production capacity. These companies will be the only two serving the Baldonian market for carbon fiber and will be facing an annual demand curve Q =1 80 - P where quantity is measured in pounds. Each unit of capacity costs $300 per pound, and each rm has a discount rate of 10 percent, resulting in an annual capital charge associated with the capacity investment of $30 per pound for each rm. The investment, once made, is totally sunk. Once the capacity is in place, there are no other yearly operating costs. a. Suppose that the choice for capacity in the Baldonian market for carbon ber is characterized by Coumot competition. What is Firm 2's reaction function? b. What are the Coumot equilibrium capacity choices for the two firms and the market price for carbon ber? Firm 1 capacity Firm 2 capacity Market price of carbon fiber c. Now suppose that Firm 1 is the leader in the market and will install capacity first. Firm 2 is the follower and will make its capacity choice after it observes Firm l's capacity choice, but before prots are realized. What are the Stackelberg equilibrium capacity choices for the two firms? What is the resulting market price? Firm 1 Stackelberg capacity Firm 2 Stackelberg capacity Market price of carbon fiber d. Suppose that the situation is still as in part (c). However, suppose that the firms can, if they please, modify their production process without any additional cost and produce synthetic fibers suitable for use in the textile market. The textile market is perfectly competitive and the firms can receive $30 per pound for the fiber they sell in the textile market. The order of moves is as follows: (1) Firm 1 chooses capacity. (2) Firm 2 observes Firm 1's capacity choice and chooses its own capacity, (3) After observing each other's capacity choice, each firm independently and simultaneously decides how much of output to the sell to the carbon fiber market and how much to sell to the textile market., (4) Given the choices made by the firms, profits are realized. Under these assumptions, what is the market price for carbon fiber? How many pounds of carbon fiber do the two firms sell to the carbon fiber market? Market price of carbon fiber Quantity sold by Firm 1 to the carbon fiber market Quantity sold by Firm 2 to the carbon fiber market