Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two firms, A and B. Each has a cost function TC = 2 + Q.

a. Determine how much each will produce if they agree to form a cartel and split the market.

b. How much profit will each make if they keep to the cartel agreement?

c. Determine the equilibrium quantities of each if they compete as Cournot oligopolists.

d. What is the market price under the Cournot oligopoly?

e. How much profit does each Cournot oligopolist make?

f. Graph their best response functions to depict your answer to part a)

g. Determine the equilibrium quantities of each if firm A is the Stackelberg leader and B is the follower.

h. Suppose firms A and B are Cournot oligopolists. If the government wants to subsidize firm A to raise its (Cournot equilibrium) output to that of a Stackelberg leader, how large should the subsidy be?

i. What would the competitive quantity and price be?