Suppose a second firm namely Pure Water Ltd enters the market. Let q1 be the output of Clear Water and q2 is the output of Pure Water. Market demand…

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1.Suppose a second firm namely Pure Water Ltd enters the market. Let q1 be the output of Clear Water and q2 is the output of Pure Water. Market demand is thus now given by q1+q2 = 90 – P. Assuming Pure Water has the same costs as Clear Water. If each firm is to maximise its profits, taking its rival’s output as given (i.e., behave as Cournot oligopolists):

(i) Find the equilibrium quantities selected by each firm?

(ii) Find the total output and what is the market price and profit for each firm?

(iii) Why is the market (public) better off as under the monopolist in question (a)?

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