we analyzed how two countries (Saudi Arabia and Iran) producing oil would behave depending on whether they are competing against each other or they are colluding and forming a cartel. Depending of their strategic behaviors, we have identified the payoffs for each country:

	IRAN
	Compete	Collude
SAUDI ARABIA	Compete	1200 1200	1392 1305
Collude	1305 1392	1350 1350

we have determined that, in a one-round setting, because each country expected the other to renege on the collusion agreement, they will both elect to compete against each other. The Nash equilibrium would be (Compete, Compete). We have also determined that game theory predicts that when the game is repeated infinitely the equilibrium will be (Collude, Collude). However, as we have determined in last week class, it depends of the discount rate.

Below whichvalue ofd(discount rate) would Saudi Arabia renege on its agreement with Iran?

Question 2

Majestic Manicures operates in a monopolistically competitive market. Its inverse demand curve is P = 85 - 4Q, where Q is the number of daily manicures and P is the price per manicure. The total cost of providing manicures is TC = 13Q and marginal cost is $13.

a. What is Majestic Manicures' profit-maximizing output level and price?

b. What is Majestic Manicures' profit?

c. What will happen to Majestic Manicures' demand curve in the long run?

d. What is the expected long-run equilibrium price for manicures?