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Two large diversified consumer product firms are about to enter the market for a newpain reliever. The two firms are similar in strategic approach.
The firms have similar demand curves so that each firm expects to sell one-half of the total market output at any given price.
The market demand for pain reliever is given as
P = 6.5 - 0.0025Q
The costs differ between firms such that firm 1 has costs of C = 3 + 2Q1 and firm 2 has costs of C = 5 + Q2.
Prices and quantities are per bottle.
(a) If the firms act as Cournot duopolists, solve for the firm market outputs and equilibrium prices.
(b) How much should Firm 1 be willing to pay to purchase Firm 2 if collusion is illegal but a takeover is not?
Hint: Firm 1 would have a monopoly position in the market.
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