What is the highest amount you are willing to pay per period
Econometrics
There are 2 firms in industry A. You are firm 1, and your rival is firm 2. The market demand and the firm’s cost functions are as follows
Demand: P=200-2(Q1+Q2)
Firm 1: Tc1= 2Q1
Firm 2: Tc1=10Q2
(a) You (firm 1) and firm 2 currently do not talk to each other. Find the output quantity produced by each firm in equilibrium. Show Work.
(b) Find the market price and each firm’s profit. Show Work
(c) Find the profit (firm 1) would earn if you were a monopoly in this market. Show Work
(d) It seems firm 2 does not know what it is doing, given its high cost. You consider paying them some amount per period so that they would stop producing in this market. Based on (b) and (c), what is the highest amount you are willing to pay them per period, including any transaction costs?
(e) Based on (b), what is the lowest amount firm 2 will accept to stop producing and selling in this market?
(f) Based on (d) and (e), can you make an acceptable offer to firm 2? Name one such offer
