There are two firms operating in the breakfast cereal market; Hellogs (Firm 1) and Lancaster Nature (Firm 2). Hellogs is a much larger firm than its rival and Hellogs makes its output decisions on profit maximisation. Total costs for the two firms are 201 and 202 respectively.

(a) What type of oligopoly model do you best think describes the relationship between these two firms? Why?

(b) If the market demand function is given by = 500 2(1 + 2), total costs for the two firms are 201 and 202 respectively, is price and 1 and 2 are the outputs of the two firms, explain how Hellogs determines it output decision and solve for the solution mathematically.

(c) What are the market shares for Hellogs and Lancaster Nature?

(d) Using a diagram, fully labelled, illustrate your solution for (b).

(e) The CEO of Hellogs gives a presentation to Lancaster students claiming that, because of its small size, Lancaster Nature is of no importance to her company. Is her claim correct? Why, or why not?

(f) After a number of years, consumer tastes switch to the Lancaster Nature brand with its purer ingredients such that the annual turnovers of the two companies are equalized. How does this affect the quantity setting behaviour of the two firms?