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Q37 suppose there are two firms in the industry firm

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Unformatted text preview: o firms in the industry, firm A and firm B. The firms enter into a collusive agreement to share the market equally. If either firm cheats, the one that cheats makes a profit of $300, while the complier loses $100. If neither firm cheats, each makes $200 profit. Suppose the game is played repeatedly. What is the cooperative equilibrium? a) b) c) d) e) Each firm makes $300 in each period Each firm loses $100 in each period Each firm makes $200 in each period Each firm makes $0 in each period Cooperative equilibrium is not possible between these firms Solution: c) Each firm makes $200 in each period Cooperative equilibrium occurs when cheating is punished. Firms cooperate and earn profits. Page 23 of 33 ©Prep101 www.prep101.com/freestuff Q38. A pizza shop is considering buying some new ovens. Each oven costs $3,000, and is expected to last for 2 years before is wears out. The ovens will generate an annual MRP of $1,815 for the first oven, $1,694 for the second oven and $1,500 for the third oven. Assume all revenues are earned...
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This note was uploaded on 08/26/2010 for the course ECON 208 taught by Professor Dickenson during the Fall '07 term at McGill.

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