Reference no: EM131424903

Whole Foods used to compete with Whole Foods for customers of natural foods groceries. Both were deciding how many stores to have across the U.S. in 2006. Each had an annual total cost function of: T C(q) = 25 + 1.2q Where q is the number of stores they operate, and costs are in millions of dollars. As the number of stores grows, the revenue each store earns per year falls. Suppose demand for stores in the U.S. can be written as: P = 3.6 − 0.004Q where “price” (price received per entire store) is in millions of dollars; q is an individual firm’s number of stores and Q is the total market number of stores. (a) Calculate the Cournot duopoly equilibrium, assuming each firm chooses how many stores to operate in ordet to maximize their profits, taking rival’s output as given. First calculate their best response function. Then compute the equilibrium quantity, price, and profit. (b) In 2007, Whole Foods purchased Wild Oats for $565 million. This allowed Whole Foods to save some costs by eliminating Wild Oats’ fixed costs, but it also allowed Whole Foods to close down some Wild Oats stores and convert the rest into Whole Foods locations. Assume Whole Foods’ cost function is unchanged. How many Wild Oats stores will it close? By what percent will market prices increase due to closures? What happens to profits?