Two firms, A and B, compete as duopolists in an industry. The firms produce a homogeneous good. Each firm has a cost function given by: C(q) = 30q + 1.5q 2 The (inverse) market demand for the product can be written as: P = 300 3Q where total output (Q) = q1 + q2 .

It occurs to the managers of Firm A and Firm B that they could do lot better by colluding. If the two firms collude, what would be the profit-maximizing choice of output? The industry price? The output and the profit for each firm in this case? 4 (c) The managers of these firms realize that explicit agreements to collude are illegal. Each firm must decide on its own whether to produce the Cournot quantity or the cartel quantity. To aid in making the decision, the manager of Firm A constructs a payoff matrix like the real one below. Fill in each box with the (profit of Firm A, profit of Firm B). Given this payoff matrix, what output strategy is each firm likely to pursue?