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QUESTION 4: 15 Total Marks Consider two firms in the Australian market. The firms A and B are the only two firms servicing the market.

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QUESTION 4: 15 Total Marks Consider two firms in the Australian market. The firms A and B are the only two firms servicing the market. They each have to decide to charge a high price or a low price. The payoff matrix below presents their alternative strategies. Firm B chooses High Price Low Price High Price Firm A earns $1000 Firm A earns $1400 Firm B earns $1000 Firm B earns - $200 Firm A chooses Low Price Firm A earns $300 Firm A earns $400 Firm B earns $1200 Firm B earns $400 Q4 a) [5 marks] Find (if any) each firm's dominant strategy. b) [5 marks] Which strategy does each firm choose in equilibrium when collusion (joint agreement) is not allowed? c) [5 marks] Suppose that collusion is allowed between the two firms. Could these firms benefit from collusion? Why or why not

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