Two firms are competing in the e-cigarette industry vis a vis the Cournot Duopoly model. They face a common demand curve given by P=150 - 2Q where P represents the market price and Q represents the aggregate quantity produced by both firms. Firm 1 faces a constant marginal cost of production of 30 per cigarette they produce. Firm 2 faces a cost of 10 per cigarette they produce. The two firms compete in quantities.

a.What is the total output supplied in the market under the Cournot Model? Market price and profit to each firm?

b.Now suppose the two firms agree to operate as a cartel and decide to share market demand such that firm 2 produces twice the amount of output produced by Firm 1. What are the quantities produced by each firm under the cartel agreement? What is the market price?

Continue to work with the cartel assumption from part b. but now assume that firm 1 cheats. What will be the output produced by firm 1? Recalculate the new market price.