1. The demand for organic food in Fayetteville is given by P = 14?0.5Q. Ozark NaturalFoods has a local monopoly on organic food in the region. Suppose that Ozark's cost ofproviding food is given by T CO = 2qO, where qO is the amount of food Ozark produces.
(a) Solve for the monopoly quantity, QM , and monopoly price, PM , that Ozark'swill choose.
b) Calculate the CS and monopoly profits ?MA competitor by the name of Whole Foods is considering entering the organic food market in Fayetteville. If Whole Foods enters, the two firms will be Cournot competition tors and must share the market demand P = 14 ? 0.5Q such that Qwill be the total quantity produced by both firms Q = qO +qW . Whole Foods has the same marginal cost as Ozark but has to pay a fixed cost of 10 to enter the market making its total cost T CW = 2qW + 10 .
(c) Write down Whole Foods profit function, and solve for its reaction function. Use the reaction function to find what Whole Foods optimal quantity of production should be if it believes that Ozark will continue to produce the monopoly quantity found in (a).
(d) Calculate the profit of each firm ?0 and ?W if Whole Foods enters and Ozark produces the monopoly output. Does it make sense for Whole Foods to enter the market (do they make positive profits)?
(e) Ozark anticipates that Whole Foods wants to enter the market, and voluntarily increases its output from QM in part (a) to qO = 16. Find the optimal quantity response by Whole Foods if it decides to enter and it believes that Ozark will continue to produce 16 units. Find the corresponding market price, and the profitof each firm ?0 and ?W . Will Whole Foods enter or stay out of the market?1
(f) What is Ozark's profit if Whole Foods stays out? Explain why a monopoly may voluntarily charge less than the monopoly price when there is a potential entrantin the market.