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Part A) Explain how economies of scale can be a barrier to...

Part A) Explain how economies of scale can be a barrier to entry.  where firms experience barrier to entry due to economies of scale [example of firms or businesses in a specific industry or market].


Part B) Why is a firm in monopolistic competition said to be competitive? In what sense is that firm monopolistic?


Part C) Game theory is one of three decision approaches oligopoly firms follow. Other two are collusion and cartels, and price leadership. In the following payoff matrix, you can find outcomes in the form of annual profit realized by two major soda-drink producers in different scenario. Coca-Cola and Pepsi know that if they cooperate and produce less soda drink, they could raise the price of the soda drink. If they work independently (i.e., both do not lower their output), they will each earn profit of $500 million. If they decide to work together and both lower their output, they can each earn $750 million profit. If one company lowers output (and raise price) and the other does not, the company which lowers output will earn $400 million profit and the company that will capture a bigger market share and will earn $900 million by keeping price low and selling a lot more quantity. Following table represents the choices available to Coke and Pepsi. What is the best choice for Coke if it is sure that Pepsi will cooperate? If Pepsi thinks Coke will cheat (or act independently), what should Pepsi do and why? What is the preferred choice if they could ensure cooperation? Explain all three answers.


Cooperate: agree to keep output low so that both of them can sell at higher per unit price.

Don't cooperate: Lower the price unilaterally, so that you can sale more quantity or capture a greater market share

Image transcription text

Pepsi Don't cooperate Cooperate (work independently) Coke: $750 million Coke: $400 million Cooperate Pepsi: $750 Pepsi: $900 million million Coke Coke: $900 Don't cooperate million Coke: $500 million (work independently) Pepsi: $400 Pepsi: $500 million million

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