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Problem: Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy.
Firm A
High Price Low Price
A = $350 A = $500
B = $350. B = $100
Firm B
A = $100. A = $250
B = $500. B = $250
(a) What is the total profit and individual firm profit if the firms both choose a high-price strategy?
(b) What is the total profit and individual firm profit if Firm A chooses a low-price strategy whereas Firm B maintains a high-price strategy?
(c) What is the total profit and individual firm profit if Firm B chooses a low-price strategy whereas Firm A maintains a high-price strategy?
(d) What is the total profit and individual firm profits if the firms both choose a low-price strategy?
(e) Suppose the two firms decided to collude. What pricing scheme do you suspect the firms will agree to?
(f) What problem do you expect will arise from collusion?
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