1) The inverse demand function for two firms in a homogenous product Stackelberg oligopoly is given by

P = 50 - (Q₁ + Q₂) and cost function for two firms are C₁Q₁ = 2Q₁ and C₂Q₂ = 2Q₂

A.What is firm 2's reaction function?

B.Determine the output of firm 1 and firm 2.

C.Identify the market price. Does it exceed marginal cost? What economic implications can you say about this?

2) Use the following payoff matrix for a one-shot game to answer the accompanying questions.

Player 2

Strategy X Y

Player 1 A 5 , 5 0 , -200

B -200 , 0 20 , 20

a. Determine the Nash equilibrium outcomes that arise if the players make decisions independently, simultaneously, and without any communication. Which of these outcomes would you consider most likely? Explain.

b. Suppose player 1 is permitted to "communicate" by uttering one syllable before the players simultaneously and independently make their decisions. What should player 1 utter, and what outcome do you think would occur as a result?