2.

(04.04 HC)

Epsilon Electronics is a firm operating in a monopolistically competitive market. It is currently earning positive economic profits.

1. Draw a fully labeled graph of Epsilon Electronics. Label the profit-maximizing quantity (Qm) and the profit-maximizing price (Pm).
2. Shade the area of profit.
3. What would happen to Epsilon Electronics' profits in the long run? Explain.
4. Does Epsilon Electronics achieve productive efficiency in the long run? Explain.

3.

(04.05 HC)

Company Alpha and Company Beta are the only hotels in a small town. Before a large event in the town, they project the following profit payoff scenarios based on offering free breakfast or not, measured in thousands of dollars.

Company BetaCompany AlphaFree BreakfastNo Free BreakfastFree Breakfast$90, $95$25, $110No Free Breakfast$105, $65$60, $55

1. Does Company Alpha have a dominant strategy to offer a free breakfast, no breakfast, or no dominant strategy?
2. Does Company Beta have a dominant strategy to offer a free breakfast, no breakfast, or no dominant strategy?
3. Assuming no cooperation, what will the profit be for each hotel?
4. The government offers a $20,000 subsidy for offering free breakfast. Draw a new payoff matrix reflecting the subsidy.
5. Assuming no cooperation, what will the profit be for each hotel after the subsidy?

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