Assume that the demand curve is Q = 14 p. Assume that there are N = 3 firms in the industry. All firms have the same marginal costs
c = 2.
(a) Calculate the Cournot-Nash equilibrium output and profit for each firm.
(b) Assume that two firms merge. E.g., Firm 1 decides to buy Firm 2 and shut it down. Assume that the merger does not change marginal costs. Calculate Cournot-Nash equilibrium profits for each active firm in the new equilibrium (i.e., when the number of firms is N 1 = 2).
(c) Assume that you are the owner of Firm 1. What is the maximum amount that you would be willing to pay to buy Firm 2? [HINT: what is Firm 1ís increase in Cournot-Nash equilibrium profits when the number of firms drops from three to two.]
(d) Assume that you are the owner of Firm 2. Would you be willing to sell Firm 2 for that price?