Assume market demand is given by P=a-Q Suppose there are two firms (1 and 2) that engage in Cournot competition Firm 1’s marginal cost of production is 1 while firm 2’s marginal cost of production...

Assume market demand is given by P=a-Q Suppose there are two firms (1 and 2) that engage in Cournot competition Firm 1’s marginal cost of production is 1 while firm 2’s marginal cost of production is c (20 marks)

a Calculate firms’ production levels and profits (5 marks)

b Calculate the Herfindahl index of market concentration when market shares are measured as production shares The Herfindahl index is a function of c When is the Herfindahl index increasing in c? Decreasing in c? (4 marks)

c Suppose a=14 and c=3 For what discount factors can collusion be sustained in which q1 = 4 and q2 =2? (11 marks)