Suppose that two firms are Cournot competitors. Industry demand is given by P = 200 - q1 - q2 , where q1 is the output of Firm 1 and q2 is the output of Firm 2. Both Firm 1 and Firm 2 face constant marginal and average total costs of $20.
a. Solve for the Cournot price, quantity, and firm profits.
b. Firm 1 is considering investing in costly technology that will enable it to reduce its costs to $15 per unit. How much should Firm 1 be willing to pay if such an investment can guarantee that Firm 2 will not be able to acquire it?
c. How does your answer to (b) change if Firm 1 knows the technology is available to Firm 2?