1.Two firms, A and B, build cruise ships.Firm A has fixed costs of $4b and marginal costs of $400m per ship and Firm B has fixed costs of $1.8b and marginal costs of $300m per ship.Both firms have the same capacity to produce cruise ships of around 200,000 tons which carry roughly 5000 passengers each, and both firms share a demand curve from the cruise ship lines of P = 400 - Q.Each firm has low price elasticities of supply, so they can't expand or contract their output easily in the short run.They must set sales goals and determine their payroll and production capacity, in advance, to survive in the market.

A)What type of Oligopoly Game would best model the market competition between A and B? Make sure that you give at least two reasons to justify your answer.

B)What are the payoff functions for Firms A and B?

C)What are the best response functions of Firms A and B?

D)What is the equilibrium P and Q of the game? (Solve for the Nash equilibrium?

Specify the production level of each firm.

E)Which firm does better?Why?

F)If these firms merged into a monopoly with fixed costs the addition of Firm A and B fixed costs and marginal costs equal to the more efficient firm, what would be the equilibrium price and quantity in this market?

G)Firm A now decides that it needs to be a first mover in the market and despite the risks this involved pursues this strategy.

H)What are the risks of being a first mover?

I)Re-solve the game as a Leader-Follower Oligopoly.What are the new strategies for each firm?How does this affect the price of ships and what will be the new results for the two firms?

J)Provide a brief explanation addressing the differences in the answers between Part (D) and Part (I).