Question

1. (½ point) Assume the world has only 2 oil suppliers, Saudi Arabia and Iraq, and that they both choose only between a low and high price. Below is a payoff matrix for the two countries. Assume this choice is made once and lasts forever. Will Saudi Arabia choose to set a low or high price? Will Iraq choose to set a low or high price? Saudi Arabia Iraq High price Low Price High Price 2.2 3,0 Low Price 0,3 2. (1 point) What characteristics must be present for the countries to collude to set a high price? Explain each feature and why it is necessary Questions 2-4 examines the effects of a firm differentiating its product 3. (1 point) Consider a world where only blank t-shirts are produced. Draw hypothetical Demand faced by a firm, MR, MC, and ATC curves for a firm in the market for t-shirts assuming the market is in a long run perfectly competitive equilibrium. Assume this firrm now has the revolutionary idea of putting the phrase "Cool People wear these T-Shirts" on all their t-shirts, and through advertising effectively convinces many buyers that their t-shirt makes them seem cooler than any other t-shirt. lllustrate how this change could affect the Demand faced by the firm and MR curves 4. (2 point) How will the firm's quantity produced change after it differentiates its product (increase or decrease)? How will the price the firm charges change after it differentiates its product (increase or decrease)? 5. (1 point) Suppose the deadweight loss generated as in the previous 2 questions is 100. Suppose the business stealing externality is 0. Let the value society places on variety of t-shirts be V. For what values of V is product differentiation beneficial to society? For what values of V is product differentiation harmful to society? 6. (1 point) Fill out the following table (on the next page) which compares and contrasts features of different forms of organizing an industry

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Answer 1

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N E: < low, low > Both Nation charge low price put stars for Best Response of Saudi Arabia, If Iraq play High, so A. Gets higher payoff from low, similarly, when Iraq plays low, S.A Gets higher payoff from low. Put dot for BR of Iraq & Gets higher payoff from low always forall action of S.A NE: when both * & present on strategy pair. Now using Grim - Trigger strategy: cooperate by playing < High, High > , If any player deviates to play low price, then Next period onwards both play only NE. Now Let both players have discount factor = delta so present discounted value of cooperation pi implies pi^c = 2 + 2 delta + 2 delta^2 + 2 delta^3 + - = 2/1 - delta pi^d = 3 + delta + delta^2 + delta^3 + - = 3 + delta/1 - delta Now for cooperation: pi^c greaterthanorequalto pi^d 2/(1 - delta) greaterthanorequalto 3 + delta/(1