You have been contracted by the government of your country to provide recommendations on the regulation of the national textile industry. Currently, the textile industry which resembles features of the perfectly competitive market is completely unregulated. Using the concepts covered in the class, please provide your advice to the problems below.

Government introduced a new regulation (reward/fine) that limits child labour. In response, all firms except for two withdrew from the market.

The groundwater pollution that results from the production of textiles remains unregulated. The remaining two firms simultaneously choose whether to pollute or change their production technology and stop polluting. If they both pollute, their profits are equal to P. If they both do not pollute, their profits are also equal to N. If one of them pollutes while the other one doesn't, the firm that pollutes gets profits of M and the firm that doesn't pollute gets profits of O.

a. What equilibrium concept that we have learned in class, can you use to solve what each of the firms is going to do? [0.5]

b. What is normal form of this game [1pt]

c. What is the equilibrium outcome? [1pt]

d. Do firms have dominant strategies? List them and explain what a dominant strategy is. [1.5pt]