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1. Company A and company B are the only two firms that produce and sell a particular kind of machinery.  The market demand curve for their product is: 
P = 580 - 3Q.
The total cost function of company A is: TCA = 410qA 
The total cost function of company B is: TCB = 460qB 
Assume first that the firms behaves as Cournot duopolists
A.  What is the output of each firm?
B.  What will be the price on the market?
C.  What will be the profit for each firm?
D.  Now assume that instead of competing in quantity, firms compete in price (i.e., the outcome is then like perfect competition).  What will be the long run equilibrium price?  Will the firms stay in business?
 

2.  There are only two firms in an industry. The market demand curve in this industry is:
P = 100 - Q 
Suppose that the total cost function for each firm is TC = 15q where q is the quantity produced by one firm.  
A.  What are the price and output if the firms behave as Cournot duopolists?
B.  What are the profit maximizing price and output if the firms collude and act like a monopolist?  
C.  What are the profits if firms behave as suggested in part a?  What are the profits if firms behave as suggested in part b?

3.  In the Oligopoly market model there is a kinked demand curve and a marginal revenue curve that is kinked and has a vertical section.  Answer the following questions concerning oligopolist markets.  Be specific and use graphs to illustrate points (I did not cover this explicitly in Tuesday's lecture - you have to find the answer in the book.)  
A.  Explain the implications of the vertical section of MR on profit maximizing equilibrium. 
B.  Economists also believe that the vertical section of the MR may be responsible for the inflexibility of some prices in oligopoly markets.  Explain why.  (Note:  A and B are closely related.)

4.  Suppose there is a conflict between a woman who wants to go Kate’s to have a drink and a man who is more interested in going to the Balloon.  While selfish, they kind of like each other, and would if necessary, sacrifice their preferences to be with each other.  Their payoffs (hours of happiness) are given below:  (The Man's payoff's are on top of the graph (M), while the Woman's are on the side (W).  For example if they both go to Kate's the Woman gets a payoff of 4 and the man a payoff of 2.)
 
 

A.  What is the dominant strategy for each firm
B.  What is (are) the Nash equilibrium (equilibria) of this game?
C.  Assume for a moment that Kate's and the Balloon are the only two bars in town.  What strategies could they use to prevent further competitors from entering the market? Give real examples that the bars could actually use.

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