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Rhonda Rite has heard of Larry’s client relation problems and decides to open a competing law office in Goldville. That office will have the same constant cost structure as Larry’s with Marginal cost = $ 150 per billable hour. Both Rhonda and Larry compete as Cournot duopolists on the output of billable hours. The annual demand for legal services in Goldville continues to be P = 1000 – x/2, where p = hourly billable rate and x = billable hour output. With the arrival of Rhonda’s firm, the input markets change and both lawyers now are facing an increasing cost environment. If the new total cost =(x/1000)x where x = billable hour output (i)What will be Larry’s and Rhonda’s profit maximizing billable rate if they charge the same hourly rate? (ii)Which clients are worse off under increasing costs over constant costs and by how much? (iii)How much are Larry’s profits? (iv)How much are Rhonda’s profits? (v)How much is the producer surplus in the increasing cost duopoly?

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1. 1. Read your textbook; 2. Look at how to calculate this; 3. Answer it to the best of your ability and then re-post to make sure you're on the right track. This is not a hard question and will be obtained if you understand your class/book. If you read the text, work on other problems that have answers in the text (look at examples) you will get this. If you don't understand, go to office hours, see the TA or tutor. Try to understand and gain knowledge. This is obtainable!
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