The dancing machine industry is a duopoly. The two firms, Chuckie B Corp. and Gene Gene Dancing Machines, compete through Cournot quantity-setting competition. The demand curve for the industry is P = 120 – Q, where Q is the total quantity produced by Chuckie B and Gene Gene. Currently, each firm has marginal cost of $60 and no fixed costs.
a. What is the equilibrium price, quantity, and profit for each firm?
b. Chuckie B Corp. is considering implementing a proprietary technology with a one-time sunk cost of $200. Once this investment is made, marginal cost will be reduced to $40. Gene Gene has no access to this or any other cost saving technology, and its marginal cost will remain at $60. Should Chuckie B invest in the new technology? (Hint: You must compute another Cournot equilibrium.)
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