Here is a payoff matrix or a norm of a game for oligopolists Northland and Southland and all profit figures are in thousands. (1 point each)

a. Use the payoff matrix to explain the mutual interdependence that characterizes these two advertising firms.

b. Assuming no collusion between these two advertising firms, what is the likely pricing outcome? Explain.

In view of your answer to part b, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement? Does a Nash Equilibrium occur in this game? Explain.

For Southland, what is their best strategy or its most dominant strategy? Explain. Can a dominant strategy be a Nash Equilibrium? Explain.

Northland’s Advertising

Low High

Budget Budget

Low

Southland’s Budget $100 $120

Advertising

$100 $60

High

Budget $60 $80

$120 $80

2. Suppose J’s is a retail outlet which sells all sorts of food items and it is a monopolistic competitive firm.

a. Draw a graph of J’s making a profit. Be sure to clearly identify the area of profit in this graph.

b. In the diagram show the profit maximizing price and output.

c. From this graph, show the area of total revenue? Total cost?

d. Is the elasticity of its demand curve more or less elastic than a monopolist?

Clearly explain your answer.

What will happen to the profits in the long-run for this monopolistic competitive firm? Explain your answer. Also draw a graph showing the end result for the long-run.