Assume that the airline industry comprised of only two firms: American and Texas Air Corp. Let suppose that the two firms have the same cost functions, C(q) = 40q. Suppose the demand curve for the industry is given by P = 100 - Q and that each firm expects the other to behave as the Cournot competitor.
Q1. Compute the Cournot-Nash equilibrium for each firm, supposing that each selects the output level which maximizes its profits when taking its rival’s output as given. Find out the profits of each and every firm.
Q2. Determine the equilibrium quantity if Texas Air had constant marginal and average costs of $25 and American had constant marginal and average costs of $40?