question archive In State College, the demand for bottled spring water is given by Q = 121 - P2
In State College, the demand for bottled spring water is given by Q = 121 - P2
Subject:MarketingPrice:2.88 Bought3
In State College, the demand for bottled spring water is given by Q = 121 - P2. There is one known spring in town controlled by the bottler First Spring (FS). In other words, FS is a monopolist in the market for spring water. FS's cost of production for gallons of water is C(Q) = 2Q.
Suppose now that a new spring is discovered in State College. A bottler called New Spring (NS) gains exclusive rights to this spring and is deciding whether or not to set up operations and compete with FS. If NS decides to join the market, NS and FS will be Cournot competitors. Both firms will face the same production costs, whereby C(Q) = 2Q. Nevertheless, NS will have to pay a one time set up cost of $2,000.
Write down NS's profit maximization problem. What is its optimal level of production as a function of FS's production decision? (Hint: Its best response.)
