1. Consider a market with an inverse demand function, P (Q)) = 60 5Q). There are two possible suppliers in the market, firms A and B. They are engaged in Cournot competition with each other (simultaneous quantity competition). Denote by ()4 and (@ B, the quantity choices of firms A and B, respectively. Total supply to the market is Q = Qa+Qp. Firm A has a cost function Cy(Q) = 10Q and firm B has cost function CB(Q) = 20Q. (a) (b) Determine Firm A's best response function, Q 4 (@g), to any quantity choice by firm B, Qg > 0. By similar argument determine B's best response function, Qp (Qa)- Determine the Cournot equilibrium of the economy. i. State the equilibrium quantity provided by each firm. ii. State the equilibrium market price. iii. State the profits of each individual firm in the equilibrium. Determine the consumer surplus in the market, C'S(Q) = 3 [P(0) P(Q)] Q. Determine the total surplus in the market (the sum of firm profits and the con- sumer surplus). The two firms are proposing that they merge. The merged entity called firm AB would produce using only firm A's production technology. The firms are arguing that they should be allowed to do so because even though they will have increased market power it will be more than outweighed by the increased production effi- ciency that results from the exclusive use of A's production technology. The authorities anticipate that firm AB will act as a monopolist. If the authorities are purely concerned with maximizing total surplus, should they allow the merger? Argue your