6. Two aircraft manufacturers are interacting as in Cournot model we discussed in class.

(7) For simplicity, assume that two firms produce perfect substitutes. Market demand is p = 21-Q, where Q = Q1 +92. Initially, both firms have constant marginal cost of 9.

Suppose that firm 1 can invest in a modern technology with which firm 1's marginal cost will be 6. (Note that firm 2's marginal cost will remain at 9.)

(1) How much would firm 1 be willing to pay for the modern technology?

(2) If firm 1 invest in the modern technology, how would firm 2's profit and consumer surplus be affected?

Answer rating: 100% (QA)

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