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Question

Q1) Two firms produce candies that are imperfect substitutes. Thisis reflected in the demand curves of the two firms’ candies, D1(p1, p2) = 100 −p1 + 0.5p2 and D2(p1, p2) = 100 − p2 + 0.5p1. Suppose each firm has constantmarginal cost of 20.(a) Explain from the demand curves why the candies produced by the two firmsare imperfect substitutes.(b) Suppose the two firms compete by making simultaneous price decisions.Calculate the equilibrium price, quantity and profit for each firm.(c) Suppose the two firms compete by making sequential price decisions, wherefirm 1 is the leader. Calculate the equilibrium price, quantity and profit foreach firm. Compare the profits of the leader vs. the follower.

Q2) Suppose an industry has ten firms. The market shares of eachfirm are: 25%, 15%, 10%, 10%, 8%, 8%, 7%, 7%, 5% and 5%.(a) What is the four-firm concentration ratio?(b) What is the Herfindahl-Hirschman Index?(c) Would you allow a merger between the 2 firms that had 5% market shareeach, according to the merger guidelines on HHI? Would you allow a mergerbetween the 2 firms that had 8% market share each?(d) Suppose the ten firms compete in a Cournot oligopoly in this industry, andthe current price elasticity of demand is -0.8. What are the profit margins foreach of the four biggest firms? What is the average profit margin (weighted byeach firm’s market share) of this industry?