Problem 1)Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn 5 million in profits. If neither of you advertise, you will each earn 10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn 15 million and thenon advertisingfirm will earn 1 million.

Answer the following questions (you must answer all):

(a)Please draw the payoff matrix for this game

(b)What is the outcome of this game? What payoff will each firm earn? (3 marks)

(c)What is the reasoning that you have followed in order to arrive at this outcome?

(d)Is this a Prisoner'sDilemma ?Why or why not?

(e)Suppose that this game is played sequentially instead of simultaneously, and that you decide first.Draw the game tree of this game.What is the equilibrium of this sequential game? How did you arrive to this conclusion?

Problem 2)A monopolist faces the following demand and cost schedules:

Quantity

Price

Totalcost

0

1

2

3

4

5

6

7

8

9

70

64

58

52

46

40

34

28

22

16

30

96

120

140

164

192

224

262

308

370

Answer the following questions (you must answer all):

(a)Which formulas would you use to compute, for each level of quantity and price: (i) the total revenue (ii) the marginal revenue and (iii) the marginal cost?

(b)Compute total revenue, marginal revenue and marginal cost for each combination of quantity and price

(c)What do we notice about the behaviour of the marginal cost as quantity increases? What might explain this behaviour?

(d)What quantity should the monopolist produce in order to maximize profit? What is the reasoning that you have followed in order to arrive at this outcome?

(e)What is the monopolist's profit if it produces the profit-maximizing quantity, and what formula did you use to compute it?