Two identical rms produce an identical product, and they are the only firms in this market. Their total annual costs are given by TC; = 300+I5q; and TC; = 290+25q2, where q; is the output of turn 1, and q; is the output of fu'm 2. Price is determined by the following industry demand curve: P=llO-Q where Q = q] + [13. Each fu'm decides how much to produce taking as given the output decision of the other a) b) C) d) g) 11) Which type of competition do the two fu'ms engage in? [A quantitative answer is not needed] Derive the reaction function for each firm. Find the equilibrium quantities and the price. Calculate the prot of each firm in equilibrium. It turns out that the land on which rm 2 has been built is legally owned by Don, who offers to rent the land to rm 2 for 500 per year. That is, this cost would occur in addition to all previously mentioned costs of rm 2. How would this be represented in rm 2's total cost function? A court rules that rm 2 has to pay the rent for this year regardless whether or not it produces. Will fu'rn 2 still produce this year? If so, what is the optimal quantity produced? The court also rules that starting next year, the fu'm would not have to pay the rent if it declared bankruptcy. Thus, 'next year' can be considered the long run, when no xed costs occur if the rm goes out of business [this includes all xed costs, not only the rent]. Will the f'u'rn produce next year or instead shut down? Suppose that we are in the second year now and firm 2 exits the market for good, so that firm 1 is the only producer. Calculate its optimal output Q] *, the new market price, and prots. Compute consumer surplus under the scenario with two rms (c.} and only rm 1 (g). Did Don do consumers a favor by demanding high land rental payments and pushing firm 2 out of business? Explain. [Note: graphs are not required for full credit but they can be useful to see how to compute the CS under the two scenarios] Let's go back to the initial setup (i.e., the problem described before question a.) Suppose that the two rms compete by setting prices. Howsr is this competition called, and what is the most likely outcome (market price and total quantity produced)? [assume there's no collusion]