Microeconomics II Graded Homework 2021-22 2 N Problem 1: Oligopoly and Collusion (35 points) Consider a market with only two firms that produce an identical homogeneous good and compete in quantities. Both are facing the market demand given by the inverse demand function PQ) = 130 - Q where Q = 91 +92 denotes the total quantity traded in the local market. The two competitors are using different technologies and therefore have different cost functions: total cost Firm 1 is C(91) = 2001 and total cost of Firm 2 is C(92) = 692, where 91 denotes the output produced by Firm 1 and q2, the output of Firm 2. Firm 2 has exclusive rights for its more cost-efficient technology, and Firm 1 has initially no access to it. (a) (7 points) Suppose that both firms make simultaneous decisions about their out- put levels. Based on the inverse demand function, what are the residual demands and marginal revenues of each firm? What are their profit-maximizing conditions? Determine both firms' reaction functions. Microeconomics II Graded Homework 2021-22 (b) (7 points) For the simultaneous quantity competition considered in (a), calculate the output levels qí, qe of both firms, the total market output QC and the market price PC Calculate the firms' profits, the total profit in this industry and the consumer surplus. Explain why this outcome is a Nash equilibrium in the game played between these two firms. Microeconomics II Graded Homework 2021-22 (c) (7 points) Now assume that Firm 2's more cost-efficient technology is available to its rival if it pays a license fee charged by Firm 2. Consider the Cournot competition game if Firm 1 pays a fixed fee F to Firm 2 and adopts the superior technology. What will be the firms' reaction functions, their equilibrium production levels, the total market output and the market price in this new situation after technology adoption? What will be now the firms' profits and the consumer surplus?

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