Questions:1. Market demand isP=224–4Q, where Q is the total output. There are two firms producing in this market, each has total costs ð¶=ð‘žð‘–2, where ð‘–=1,2. Marginal costsare ð‘€ð¶ð‘–=2ð‘žð‘–, notice they are not constant.a.Calculatethe Cournot equilibrium firm outputs, market price, firms’ profitsb.Calculatethe Stackelberg equilibrium firm outputs, market price, firms’ profits (firm 1 is a leader in deciding their output, and firm 2 is a follower).c.Evaluate market efficiency for a and b: calculate total surplus as the sum of consumer surplus and producer surplus (firms’ profits). Explain why Cournot and Stackelberg markets are different in terms of efficiency.
2. Market demand isP = 100 − Q. Firm 1 has constant marginal cost of $10, firm 2 has constant marginal cost of $25. These firms are thinking about merging. They argue that their combined marginal cost would fall to $10, so the merger is welfare improving. Check whether it’s true by calculating all welfare benefits and costs from the merger. Would you recommend this merger?
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