Problem 1: Suppose a firm in monopolistic competition has the following demand schedule. Suppose the marginal cost is a constant $70. How much will the firm produce? Is this a long or short-run situation? If the firm is earning above-normal profit, what will happen to this demand schedule?
Price Quantity
100 1
95 2
88 3
80 4
70 5
55 6
40 7
22 8
Problem 2: Use the payoff matrix below for the following exercies.
The payoff matrix indicates the profit outcome that corresponds to each firm's pricing strategy.
Firm's A's Price
$20 $15
Firm's B's Price
$20 Firm A earns $40 profit Firm A earns $35 profit
Firm B earns $37 profit Firm B earns $39 profit
$15 Firm A earns $49 profit Firm A earns $38 profit
Firm B earns $30 profit Firm B earns $35 profit
a. Firms A & B are members of an oligopoly. Explain the interdependence that exists in oligopolies using the payoff matrix facing the two firms.
b. Assuming that the firms cooperate, what is the solution to the problem facing the firms?
c. Given your answer to part b, explain why cooperation would be mutually beneficial and then explain why one of the firms might cheat.