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Suppose the inverse demand curve has the following formula: p = $7 – 0.01Q. There are two firms. The cost function for the first firm is TC = 1 Q and for the second firm TC = 2Q
a) If the two firms were to combine, what Q would they produce in each division? What is the total Q, p, and profits?
b) Calculate the same for the Cournot-Nash equilibrium if they compete. (Note: If you haven’t had calculus, calculate MR for firm 1 by the usual shortcut, and set it equal to MC to get firm 1’s reaction function. When you calculate 1’s MR as a step towards 1’s reaction function, treat any term involving firm 2’s output as part of the constant that defines the price-axis intercept. Similarly to get 2’s reaction function).
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