The inverse demand curve for a product is = 20 /5 , where is the total volume brought to the market. At present two firms serve this market. Firm 1 has constant marginal costs of 5, while Firm 2 has constant marginal costs of 2. Both firms have fixed costs of 100.

a) Assuming the fixed costs are sunk, calculate the equilibrium quantities, price and profits for the two firms.

b) Now assuming the fixed costs are not sunk, calculate the equilibrium quantities, price and profits for the two firms.

c) Discuss any competition issues raised by your answer in part b).

d) Discuss the theoretical relevance of sunk costs to competition in markets.