The inverse market demand curve for paper is given by the P=400-2Q. There are 2 firms who form the fax paper. Each firm has unit cost of production equal to c=40 and they compete in the market quantities. That is, they can choose any quantity to form, and they make the quantity choices at the same time.
1. Illustrate how to derive the Cornet Nash equilibrium to this game. Determines the firm's profits in equilibrium?
2. Calculate the monopoly output that is the one that maximizes total industry profit? Why isn't forming 1 half the monopoly output a Nash equilibrium outcome? Discuss and demonstrate why?
3. Assume now that firm 1 has a cost advantage. Its unit cost is constant and equal to c=25 whereas firm 2 has the higher unit cost of c=40. Determine the Cornet outcome now? Determines the firm's profits?