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2. Suppose one Japanese firm and one American firm dominate the US market of widgets. They...

2. Suppose one Japanese firm and one American firm dominate the US market of widgets. They share the same cost structure: TC = 250 + 40q. The only demand for widgets is in the US and is p = 100 – Q.

(a) (16 points) If these two firms compete in quantity at the same time, what is the Cournot equilibrium output, price, profit level by each firm?

(b) (12 points) Suppose the American firm acquires the Japanese firm and therefore becomes a monopoly in this market. Calculate the monopoly’s output, price, and Lerner Index. How much is the deadweight loss due to monopoly behavior?

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