Would be willing to spend to set up operations in hennepin

Reference no: EM133295154

Assignment:

The tiny neighboring countries of Hennepin and Ramsey once had strict isolationist policies that prohibited international trade. In each country, the main food staple is carrots. The demand curve for carrots in each country is Q = 1 2 (12 - P). Each country was served by its own carrot monopolist. Each of these monopolists has a cost function of C(q) = q2 . Then, a new treaty was signed that opened up trade between the two nations. Now both firms can sell in both countries. However, after a while, they learned that the carrots that were transported internationally were not fresh enough for consumer tastes. Hence, in order to sell in a country, a firm needs to set up a production operation in that specific country. Since the market of each country will therefore operate independently, let's focus on just one county, Hennepin, and call the original Hennepin monopolists Firm 1, and call the other firm Firm 2.

Because Firm 1 already has operations in place for the Hennepin market, it can publicly commit to a quantity choice q1 while Firm 2 is still building out its operation in Hennepin. After observing q1, Firm 2 will also select q2, and price will be set by the market demand curve in Hennepin with Q = q1 + q2. Assume that once Firm 2 has its production operation built, its cost function for carrot production in Hennepin will also be C(q) = q 2 .

(a) What are the Stackelberg equilibrium choices of q1 and q2?

(b) What are the resultant profits?

(d) How much would Firm 1 be willing to expend on lobbying activities that would prevent Firm 2 from obtaining the permits required to build a production operation in Hennepin?

Reference no: EM133295154

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