Suppose that there are two firms in an industry and they face market demand y=400-0.5p where y=y1+y2 . The total cost functions of the firms are C1(y1)= 40y1 and C2(y2)= 2y2 2 . a) Assume initially that the firms enter into Cournot competition. Calculate the equilibrium market price and each firm's equilibrium output. That is, find y1 c , y2 c , and pc . b) Calculate the equilibrium market price and each firm's equilibrium output assuming that firm 2 is the Stackelberg leader and firm 1 is the follower. That is, find y1 s , y2 s , and ps c) Will the firms prefer collusion (cartel) equilibrium or Cournot game? Based on your calculations in parts above, explain clearly.

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