Reference no: EM132303006

Suppose demand for a computer chip is given by p = 100 - q. There is currently one firm producing the chip using a patented process that yields total cost function C(q) = 60q. Suppose that both the incumbent firm and one potential rival are aware of a potential, new process for producing the chip that would reduce costs. This new process, if developed, would yield a cost function of C(q) = 50q. If the incumbent develops the new process, it will remain a monopolist in the market for the computer chip with the new cost function. If the rival develops the process, the two firms will share the market for the computer chip, and compete on quantity (Cournot competition). In the latter case, the incumbent will use the old production process, and the rival will use the new production process. How much is the incumbent willing to invest in developing the new process? How much is the rival willing to invest in developing the new process?