In New Yotk, the demand for bottled spring water is given by Q = 121 − 1/2P . There is one known spring in town controlled by the bottler First Spring (FS). In other words, FS is a monopolist in the market for spring water. FS’s cost of production for gallons of water is C(Q) = 2Q. Suppose now that a new spring is discovered in State College. A bottler called New Spring (NS) gains exclusive rights to this spring and is deciding whether or not to set up operations and compete with FS. If NS decides to join the market, NS and FS will be Cournot competitors. Both firms will face the same production costs, whereby C(Q) = 2Q. Nevertheless, NS will have to pay a one time set up cost of $2,000.
1. Suppose that, right before setting up, both firms learn that New Spring had underestimated the one time setup cost. A new estimate reveals this one time set-up cost is actually $3,600. How do the market equilibrium quantity and price change in light of this new information? What about total industry profits?