Zeus and Iron are the only two cement producers in Gotham. The cement they produce is...

 

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Zeus and Iron are the only two cement producers in Gotham. The cement they produce is essentially identical. In this market, each firm chooses the output level to produce and the price is determined by aggregate output (Cournot competition). The inverse demand for cement is given by P = 225 - Q 2.Q is measured in tons and P is in euros. The marginal cost for Zeus is constant at 50 euros/ton. The respective cost for Iron is constant at 40 euros/ton. A technological innovation in the production process allows both firms to reduce marginal cost by 5 euros/ton. a) How much would each firm be willing to pay for the innovation, if it were the only firm to acquire it? (Mark 1.5) b) Consider a situation where firms' managers, simultaneously and non-cooperatively decide whether to acquire the innovation or not, which costs 900 euros, and then compete in quantities. What is the equilibrium of this game, based on its payoff matrix? (Mark 2.0) [Marking scheme: economic intuition 30%, use of appropriate arguments 30%, correct application 20%, overall presentation 20%] Zeus and Iron are the only two cement producers in Gotham. The cement they produce is essentially identical. In this market, each firm chooses the output level to produce and the price is determined by aggregate output (Cournot competition). The inverse demand for cement is given by P = 225 - Q 2.Q is measured in tons and P is in euros. The marginal cost for Zeus is constant at 50 euros/ton. The respective cost for Iron is constant at 40 euros/ton. A technological innovation in the production process allows both firms to reduce marginal cost by 5 euros/ton. a) How much would each firm be willing to pay for the innovation, if it were the only firm to acquire it? (Mark 1.5) b) Consider a situation where firms' managers, simultaneously and non-cooperatively decide whether to acquire the innovation or not, which costs 900 euros, and then compete in quantities. What is the equilibrium of this game, based on its payoff matrix? (Mark 2.0) [Marking scheme: economic intuition 30%, use of appropriate arguments 30%, correct application 20%, overall presentation 20%]

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