Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy.

Firm A

High Price Low Price

A = $350 A = $500

B = $350. B = $100

Firm B

A = $100. A = $250

B = $500. B = $250

(a)What is the total profit and individual firm profit if the firms both choose a high-price strategy?

(b)What is the total profit and individual firm profit if Firm A chooses a low-price strategy whereas Firm B maintains a high-price strategy?

(c)What is the total profit and individual firm profit if Firm B chooses a low-price strategy whereas Firm A maintains a high-price strategy?

(d)What is the total profit and individual firm profits if the firms both choose a low-price strategy?

(e)Suppose the two firms decided to collude. What pricing scheme do you suspect the firms will agree to?

(f)What problem do you expect will arise from collusion?