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Suppose the two catering companies in town, firm A and B, face monthly market demand of:P=150 1/3Q where P is the price of an event

Suppose the two catering companies in town, firm A and B, face monthly market demand

of:P=150 1/3Q

where P is the price of an event catered and Q is the number of events catered. The

firms offer identical services and each face the same costs: $70 per catering event.There are no fixed costs.

(a)Suppose that the catering companies compete on price (Bertrand com- petition). What profit does each catering company make in equilibrium? Show your work or explain your answer using one or two sentences.

(b)Suppose that the two firms are considering coordinating their efforts to increase profits (instead of competing). This is known as collusion. If the two firms collude, then they act as a monopolist and split the profits evenly. How many events does each firm cater if they collude?

(c) How much profit does each firm make if they collude?

(d)Do you expect the agreement to collude to last in the long-run?

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