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Two firms, CS Corporation and JL Associates, make identical goods, GPX units, and sell them in the same market. The yearly demand in themarket is Q = 1200 p. Once a firm has built capacity, it can produce up to its capacity each year with a marginal cost MC = 0. Building a unit of capacity costs 2400 (for either CS or JL) and a unit of capacity lasts four years (you may solve for an equilibrium for a year, assuming costs of a unit of capacity id 600).Once production occurs, the price in the market adjusts to the level at which all production is sold.
(a) If CS knew JL were going to build 100 units of capacity, how much would CS want to build? If CS knew JL were going to build x units of capacity, how much would CS want to build (that is, what is CSís best response function in capacity)?
(b) If CS and JL each had to decide how much capacity to build without knowing the other's capacity decision, what would the one-shot Nash equilibrium be in the amount of capacity built?
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