Suppose that demand is given by P = A - Q and marginal costs are constant and equal to zero. Assume that there are two firms that are Cournot competitors, and punishments are grim.
(a) As a function of the discount factor, find the minimum industry output that is sustainable- assuming the two firms agree to produce the same amount.
(b) As the discount factor increases, what happens to the extent of collusion or the exercise of market power? Why?