There are two car companies operating in a country, Cord and Fevy, that produce identical cars. The market inverse demand is estimated to be P(Q)=250.1Q where price, P, is in 1,000 s of dollars and market quantity, Q, is in 1,000 of units. Both cars have a marginal cost of $10 where marginal cost is also in 1,000 s of dollars. The firms simultaneously decide how many cars to produce at the beginning of the year and then prices adjust so that supply equals demand. (a) Determine Cord's best response function. (b) Determine the equilibrium price, quantity, and profit of the game played between Cord and Fevy. (c) Suppose that an increase in demand shifts demand to P(Q)=280.1Q. What happens to price and the number of cars sold? (d) Say the firms develop technology to quickly adjust quantity of cars produced. Therefore, firms compete by setting price. What is the equilibrium price, quantity, and profit of the game played between Cord and Fevy? Does the answer depend on whether demand is P(Q)=250.1Q or P(Q)=280.1Q ? Explain. (e) Assume demand is P(Q)=250.1Q and firms compete by setting quantity. It costs F for a third firm to develop a new car factory and enter the market (assume that if the firm enters, it has the same marginal cost as the other firms and earns profit for one period before the game ends). What is the maximum F such that this third competitor is willing to enter the market? There are two car companies operating in a country, Cord and Fevy, that produce identical cars. The market inverse demand is estimated to be P(Q)=250.1Q where price, P, is in 1,000 s of dollars and market quantity, Q, is in 1,000 of units. Both cars have a marginal cost of $10 where marginal cost is also in 1,000 s of dollars. The firms simultaneously decide how many cars to produce at the beginning of the year and then prices adjust so that supply equals demand. (a) Determine Cord's best response function. (b) Determine the equilibrium price, quantity, and profit of the game played between Cord and Fevy. (c) Suppose that an increase in demand shifts demand to P(Q)=280.1Q. What happens to price and the number of cars sold? (d) Say the firms develop technology to quickly adjust quantity of cars produced. Therefore, firms compete by setting price. What is the equilibrium price, quantity, and profit of the game played between Cord and Fevy? Does the answer depend on whether demand is P(Q)=250.1Q or P(Q)=280.1Q ? Explain. (e) Assume demand is P(Q)=250.1Q and firms compete by setting quantity. It costs F for a third firm to develop a new car factory and enter the market (assume that if the firm enters, it has the same marginal cost as the other firms and earns profit for one period before the game ends). What is the maximum F such that this third competitor is willing to enter the market
