Consider the market for donuts which is characterised by the following demand curve:

P = 30 - Q

where Q is in dozens per day. There are two suppliers for donuts, Mike and Norman, who each have the same marginal cost of $2 per dozen donuts and no fixed cost.

a) If they collude (i.e. act together as a monopoly) how many donuts will they collectively sell and at what price?

Now assume that both Mike and Norman have an incentive to break their deal and lower their price by $4. If they act like this, they will capture the whole donut market.

b) Draw Mike and Norman's profits in a payoff matrix.

c) What is the Nash Equilibrium of this game? Describe the nature of this game (for example, "entry game").

Now assume that a competition regulator decides that price changes can only occur once per month, otherwise Mike and Norman will be shut down for changing their prices too often.

d) Draw a new payoff matrix showing Mike and Norman's profits per month.

e) What is the new Nash Equilibrium of the game? Describe the nature of this game (for example, "entry game").