In oil-rich-land, Dinoco and Fossilfu are the only two petroleum companies. They produce the same product and have the same increasing function of marginal cost of production.

A. Assume the two companies do not collude with one other. Use the Cournot model to explain each firms optimal decisions on output and price in an attempt to maximize their profits. You have to clearly state the assumptions that each firm has to make (3 marks) and draw a graph to illustrate their profit-maximizing position (6 marks).

B. Consider the following pay-off matrix for the two companies. (Fossilfu on the left, Dinoco on the right) What is the dominant strategy for each company in this one-shot game? (4 marks) What will be the action eventually taken by each company and their pay-off respectively? (4 marks) Is the outcome a Nash equilibrium and why? (4 marks)

C. Both companies will be better off if they collude in comparison to the case when both cheat. What would be you suggestion for the two companies in order to sustain the collusion? Why will it work? (4 marks)