Duopoly firms sell an identical product but have different cost structures. Firm 1 produces at a constant marginal cost of $1 and has no fixed cost, while Firm 2 has a marginal cost of $2 and no fixed cost. Assume the firms act independently and output choices are made simultaneously. The industry inverse demand function is P = 15 − Q.

a. Solve for the Cournot equilibrium price and quantities.

b. The two firms agree to merge and argue that consumers will benefit since Firm 1’s production methods will be used, so marginal cost will be $1 for all output and prices for some consumers will decrease. Evaluate this claim.

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Demand function is given by P 15 Q Two Firms Marginal Cost of firm 1 MC1 1 Marginal Co... View the full answer