(1) Consider two people, Bonnie and Clyde, who have been accused of committing a crime. Now they have to confront with   the police and they both know that if both of them confess each will receive a prison term of 6 years but if neither of them confess each will have to serve 1 year in prison. If however only one of them confesses he/she will be rewarded by being left free while the other serves 15 years in prison.

(a) Define what a dominant strategy is. Draw a game three to show the dominant strategy for Bonnie and Clyde
(b)What is the relevance of this prisoner's dilemma game with the behavior of firms in oligopolistic markets?

(2) Your firm sells a very popular children's toy. The manager of another firm is also considering about introducing a similar toy. You have the following facts
 

Your average cost of production is constant at 2$
At the current monopoly price of 5$ you sell 120 toys per day
If the second firm enters the market your price would decrease to 3$ and you would only sell 80 toys per day
You could prevent the entry of a second firm by increasing your output to 150 toys per day 150 toys per day and cutting your price to 4$
After you try to prevent the entry of the second firm if the second firm insists on entering the market prices would decrease to 1.5$ and you would sell 90 toys per day

Draw a game three for the entry deterrence and show your dominant strategy i.e., should you prevent the entry of the second firm or not.
 

(3) Starting an electric plant is very costly, but once it is built the marginal cost of generating electricity is very small. Assume that the cost of building the plant is $20 million, but the marginal cost per kilowatt hour (kWh) is then a constant $5.

(a) Draw the approximate shapes of the marginal cost and average cost curves
(b) On your graph draw a representative demand curve for the industry. Given your demand curve, what is the efficient price? Why doesn't the regulatory agency require the monopolist to charge the efficient price
(c) On your graph show the average cost price and indicate the deadweight loss. What will happen to the size of the deadweight loss if the monopoly does not minimize its costs?
(d) Since there is deadweight loss, why is it beneficial to the society to have only one firm in this market. Wouldn't competition make this market more efficient?
 

(4) Why do the firms in oligopolistic markets resort to retaliation strategies? Name the most important retaliation strategies and provide a brief explanation for each strategy.

(5) Explain the long run equilibrium in monopolistically competitive markets? How does it differ from the long run equilibrium in perfectly competitive markets? What are the similarities between long run equlibrium in perfectly competitive markets and long run equlibrium in monopolistically competitive markets?