Question: Let inverse demand, marginal cost and average total cost be given by: P = 20 Q MC = ATC = 4 Calculate the monopoly equilibrium.

Let inverse demand, marginal cost and average total cost be given by: P = 20 Q

MC = ATC = 4

Calculate the monopoly equilibrium.

Suppose that there are two producers who wish to form a cartel. If they split production evenly between themselves, how much will each produce? What will their individual profits be?

Suppose now that one producer deviates from the cartel arrange- ment. How much will this producer produce? What are each producers individual profits in this case?

Suppose that both producers deviate from the agreement. Find each producers best-response function. What are the Nash equi- librium quantities and associated profits?

Summarize your results from b-d in a payoff matrix.

What outcome would you expect to occur in this setting? Is co- operation likely in this one-shot, static game?

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