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1. There are three identical firms in an industry. The inverse demand curve is p = 1-Q, where Q denotes total output. Marginal cost is constant and equal to c. (a) Compute the Cournot equilibrium. (33%) (b) Show that if two of the firms merge (transforming the industry into a duopoly) the profit of these firms decreases. Explain. (33%) (c) How would this result be changed if the firms were competing in prices? (33%)11 Two lms campete Cannot-style in quantities. Both can produce at censtant average and marginal cost equal to 0. Demand is given by q = 1 p. Firm 2 is managed by its Owner and behaves as a conventional prot maximising rm. Firm 1 is run by a manager. The pay of the manager is given by M 2 Mom + {1 ode-1], where in 2 pm denotes prots and Q1 denotes the sales of rm 1) (a) Find the reaction curves of rm 1 and rm 2. (211%) [b] The owner of rm 1 wish: to make his/her prot as large as possible. What value of a should (3)1113 choose? ((30%) [e] Explain the economic intuition for your answer. [2G%)