Problem 1: Monopolistic Competition [8 Points] Suppose we are studying a coffee shop, that sells only coffee, and operates in a monopolistically competitive environment. This coffee shop sells coffee made from its own brand of coffee beans, known affectionately as "Power Beans". This coffee shop faces its own individual demand curve given by: QD = 120 - 30p Now suppose that in this example, the coffee shop has the total costs defined by: TC = 40 + 2Q 1. Given the market demand, and the coffee shop's total cost curve, what quantity does it choose to produce, what is the market price, and what are their short-run profits? Show all of your work. [HINT: This question will take multiple steps. Start with what needs to be true for this firm to be profit maximizing.] [5 points] 2. Draw a figure here that includes: [2 points] a. The Demand Curve b. The MR Curve c. The MC Curve d. The ATC Curve 3. In the Long-Run, what would we expect to happen to the price of coffee for "Power Beans", assuming that this coffee shop does not leave the market? Explain why. [1 point]Problem 2: Price Cutting [10 Points] Suppose that we are studying a firm that produces cars, and they exist in an oligopoly. Specifically, there are two firms in the market which produce cars that are basically identical. They are so close that they face they both share the same market demand. Suppose that market demand is given by: p = 200 - 0.5QD And assume (for simplicity) that both firms have a constant marginal cost of $10, with zero fixed costs. Each firm has to decide between two prices they could set, which are either (i) $105 or (ii) $60. If both firms choose the same price, then they split the market (i.e. they each produce half of the market demand and earn the revenue for those units). If the two firms choose different prices, then the firm with the lowest price takes all of the market demand at that price, and the firm with the highest price produces nothing (i.e. Q = 0). 4. Fill in the following payoffs in the payoff matrix for this game. Show your work. [Note: the payoffs should be profits for both firms in each of the four possible outcomes] [3 points] Firm B $60 $105 $60 A: A: B: B: Firm A A: A: $105 B: B: 5. Is $105 the profit-maximizing price to set for a monopolist? How do you know? i.e. show your work. [2 points] 6. Which outcomes, if any, are Nash Equilibria? How do you know? [2 points] 7. If a cartel could form between these two firms, is it possible for them to make higher profits? Would this be likely to be sustainable? Why or why not? Explain your answer. [3 points]