(a)Consider two competing firms firms in your town, Firm A and Firm B. Each firm is making a strategic decision whether or not to reduce its current price by 20 percent, in order to increase its profit. Below is the profit payoff matrix (in thousand dollars) with the expected profits. Use the payoff matrix to provide comprehensive answers to the following questions:

FIRM A

Reduce price, $, (20%)

Do not reduce price

FIRM B

Reduce price, $, (20%)

8060

10020

Do not reduce price

40100

13040

(i)Does Firm A have a dominant strategy?Explain.

(ii)Does Firm B have a dominant strategy?Explain.

(iii) Does the game have a Nash equilibrium?Explain.

(iv)Explain the concept of interdependence in oligopolymarket, using the price as a competitive strategy.

(b)Explain the long-run equilibrium in a monopolistically competitive market. How does this equilibrium differ from that in a perfectly competitive market? How is price related to average total cost and to the marginal cost in each of these markets?

Note:You can use appropriate abbreviations/symbols to save time.