Question 1

Sendai Bhd. and Talam Bhd. serve the same market. They have constant average costs of RM18 per unit. The firms can choose either a high price (RM59) or a low price (RM29) for their output. When both firms set a high price, total demand is 25,000 units which is split evenly between the two firms. When both set a low price, total demand is 45,000, which is again split evenly. If one firm sets a low price and the second a high price the low priced firm sells 28,000 units, the high priced firms only 11,000 units.

Required:

a.Analysethe pricing decisions of the two firms as a non-co-operative game and answer the

following;

i. Construct the pay-off matrix, where the elements of each cell of the matrix are the two

firm's profit. (15 Marks)

ii. Derive the equilibrium set of strategies. (5 Marks)

b. Discuss TWO (2)main issues in an oligopoly market structure. (5 Marks)

(Total: 25 Marks)