Economics Homework Help

Question 1

Consider two oligopolistic firms (Firm 1 and Firm 2) in a price-setting duopoly. Both firms have
no marginal costs ( = 0) but do have fixed costs . The demand functions
= 10 , = 1, 2
for Firm 1 and Firm 2 are given by and , respectively.
1 = 13 − 2
1 +
2

2 = 13 − 2
2 +
1
A. Calculate the values of profit-maximizing quantities and prices for Firm 1 and Firm 2, and
their respective profits.
B. If the two firms are working together and collude on price ( ), find the new
1 =
2 =
collusion price.
C. Construct a payoff matrix for Firm 1 and Firm 2 where their strategies are the prices
under competing with each other and collusion. Find the dominant strategies for each
firm along with the resulting equilibrium.’