Consider an industry with two firms, each having marginal costs and total costs equal to zero. The industry demand is P = 100 − Q where Q = Q1 + Q2 is total output. 4. If the firms interact only once, is there a profitable deviation (cheating) from cartel for any firm? Find the profit of the firms in case of cheating. If a firm deviates from cartel (cheats) it will play its profit maximizing quantity, which is the quantity on its best response function. Now, use the best response function of firm 1 to find firm 1's cheating quantity, when firm 2 follows the rules of the cartel. Use the demand curve to find the new price level and then calculate profits. 5. Design a 2x2 normal form payoff matrix with strategies cartel and cheat. Complete the payoffs using the profits you calculated in the previous parts. Firm 2 Cartel Cheat Firm 1 Cartel Cheat 6. Now, assume that players interact twice. Hence the game is a twice repeated game. Is it possible to have (cartel,cartel) as an outcome? Explain.
Consider an industry with two firms, each having marginal costs and total costs equal to zero. The industry demand is P = 100 − Q where Q = Q1 + Q2 is total output.
4. If the firms interact only once, is there a profitable deviation (cheating) from cartel for any firm? Find the profit of the firms in case of cheating. If a firm deviates from cartel (cheats) it will play its profit maximizing quantity, which is the quantity on its best response function. Now, use the best response function of firm 1 to find firm 1's cheating quantity, when firm 2 follows the rules of the cartel. Use the demand curve to find the new price level and then calculate profits.
5. Design a 2x2 normal form payoff matrix with strategies cartel and cheat. Complete the payoffs using the profits you calculated in the previous parts. Firm 2 Cartel Cheat Firm 1 Cartel Cheat
6. Now, assume that players interact twice. Hence the game is a twice repeated game. Is it possible to have (cartel,cartel) as an outcome? Explain.
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