Economists also have models for situations in which firms repeatedly compete against one another.

a. Give a real-world example where "repeated interaction" seems to be a reasonable model of reality. Choose your own example rather than one we discussed in class.

b. Consider a market with two firms. Suppose that the two firms will each earn $1000 today if they both charge the monopoly price. Yet if both charge the lower Cournot price, each firm will earn $500. If one firm charges the monopoly price and the other charges a lower price, the undercutting firm will earn $2000 and the other firm will earn $0. What will happen if this game is repeated once?

c. What will happen if the game above is repeated twice? Be precise in explaining why the outcome is an equilibrium.

d. What will happen if the game above is repeated forever? Be precise in explaining why the outcome is an equilibrium.