(ii)In a collusive equilibrium.the two firms will collectively act like a monopolist. When the marginal cos of firm A increases,firm A will reduce their production This will increase price and cause firm B to increase production.Price will be higher and total quantity produced will be lower. (ii)Given that the good is homogeneous both will produce where price equals marginal cost.Firm A will increase price to $80 and firm B will keep its price at $50.Assuming firm B can produce enough output,they will supply the entire market. b.The marginal cost of both firms increases (i)Again refer to figure 12.4.The increase in the m hift both reaction functions inwards.Both firmswill decrease quantity produ and price will increase. (ii)When marginal cost increases,both firms will produce less and price will increase,as in the monopoly case. (iii)As in the above cases,price will increase and quantity produced will decrease. c.The demand curve shifts to the right. (i)This is the opposite of the above case in part b.In this case.both reaction functions will shift outwards and both will produce a higher quantity.Price will tend to inerease (ii)Both firms will increase the quantity produced as demand and marginal revenue increase.Price will also tend to increase. (iii)Both firms will supply more output.Given that marginal cost is constant,the price will not change. 8.Suppose the airline industry consisted ofonly two firms:American and Texas Air Corp.Let the two firms have identical cost functions,C(q)=40q.Assume the demand curve for the industry is given by P=100-Q and that each firm expects the other to behave as a Cournot competitor. a.Calculate the Cournot-Nash equilibrium for each firm,assur ing that each chooses the output level that maximizes its profits when taking its rival's output as given.What are the profits of each firm? To determine the Cournot-Nash equilibrium,we first calculate the reaction function for each firm,then solve for price,quantity,and profit.Profit for Texas Air. 元，is equal to total revenue minus total cost: 元1=(100-Q1-Q2)Q·40Q,or 1=100-Q-QQ2-401,0r元1=60-Q-Qz The change in with respect tois (ii) In a collusive equilibrium, the two firms will collectively act like a monopolist. When the marginal cost of firm A increases, firm A will reduce their production. This will increase price and cause firm B to increase production. Price will be higher and total quantity produced will be lower. (iii) Given that the good is homogeneous, both will produce where price equals marginal cost. Firm A will increase price to $80 and firm B will keep its price at $50. Assuming firm B can produce enough output, they will supply the entire market. b. The marginal cost of both firms increases. (i) Again refer to figure 12.4. The increase in the marginal cost of both firms will shift both reaction functions inwards. Both firms will decrease quantity produced and price will increase. (ii) When marginal cost increases, both firms will produce less and price will increase, as in the monopoly case. (iii) As in the above cases, price will increase and quantity produced will decrease. c. The demand curve shifts to the right. (i) This is the opposite of the above case in part b. In this case, both reaction functions will shift outwards and both will produce a higher quantity. Price will tend to increase. (ii) Both firms will increase the quantity produced as demand and marginal revenue increase. Price will also tend to increase. (iii) Both firms will supply more output. Given that marginal cost is constant, the price will not change. 8. Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, C(q) = 40q. Assume the demand curve for the industry is given by P = 100 - Q and that each firm expects the other to behave as a Cournot competitor. a. Calculate the Cournot-Nash equilibrium for each firm, assuming that each chooses the output level that maximizes its profits when taking its rival’s output as given. What are the profits of each firm? To determine the Cournot-Nash equilibrium, we first calculate the reaction function for each firm, then solve for price, quantity, and profit. Profit for Texas Air, 1 , is equal to total revenue minus total cost: 1 = (100 - Q1 - Q2 )Q1 - 40Q1 , or   1 1 1 2 1 2 1 1 1 1 2 1 2 =100Q −Q −Q Q − 40Q , or = 60Q −Q −Q Q . The change in 1 with respect to Q1 is