1. Construct the Coutrnot profit function. Differentiate this function and solve for the reaction functions of firm one and firm two.

2. Consider the following general reaction function that is your solution to #1.

a. What is the Nash equilibrium level of output for firm i?
b. What is the Nash equilibrium level of output for firm j?
c. What is the Nash equilibrium level of output for the industry?
d. Suppose that firm one were attempting to prevent firm two from entering the market. How much output must firm one threaten to produce in order to cause firm two to stay out of the market?
e. Consider your answer to part d, is this threat credible? Explain the rational for your answer.

3. Calculate dead weight lose for the Cournot equilibrium.

a. What will happen no this dead weight loss as the number of firms increases from 2 upward?Consider two rival dentists who have opened up offices in a small city. The city consists of a small downtown area with a few office buildings and local government administration buildings as well as some downtown shopping and restaurants. Most of the inhabitants of the city work downtown. The downtown area buts up against a large mountain to the west. To the east of the downtown is a sprawling suburban area which we will call the "country" where most of the inhabitants live.

4. Use lessons from the Hotelling model in answering the following parts.

a. Assume that dental patients shop around for the best price, where would you expect these dentists to place their offices. Both in the country, both in the city, one in the city the other in the country, both in between the city and country? Explain your answer.

b. Now assume that zoning requirements forced all dentists to operate within the downtown and on the same block! Also continue the assumption that prices are flexible and consumers shop around. Will the dentists accept the same insurance plans or not? Explain your answer.

c. Assume that one dentist specialized in pediatric dentistry and the other in services for adults and that firms are forced to locate on the same block downtown. What would this situation make you believe was the nature of price competition-weak or strong? Explain.

d. Consider your answer to part b. Assume that the city authorities placed a price floor on dentist services so that dentists could not lower than a certain amount for services. Do you think that this regulation would change the willingness to accept all health care insurance plans? Explain.

5. Use lessons from the Value curve and the concept of value offer in answering the following parts:

a. Consider that the industry is operating at point B (P1,C1). How might a firm follow a cost leadership approach.

b. Assume that the industry is operating at point A(P0,C0). How might a firm follow a benefit leadership approach.

c. In terms of price margin above cost, does it appear that a cost leadership or a benefit leadership approach benefit the firm most?

d. Consider the elasticity characteristic of the demand curve. Assuming that the demand curve is inelastic, what can we say about the standard benefit leadership approach? Would this approach be more favorable to the firm if the demand curve were elastic? Please explain your answer.

e. If the firm were to move from positioning its product at point A to point B, would the value offer to the consumer change? Explain your answer.

6. Consider the following good: a new car. Think about the various attributes and characteristics of the car (color, mpg, etc) List at least five of these attributes and define them as either horizontal or vertical.