Answer to Question 1
A
Answer to Question 2
a) The market for smart phones in Techland is an example of an oligopoly with homogeneous products. Firms in an oligopoly with homogeneous products often enter into a price war to increase their market share. Each firm cuts its price slightly below its rival's price to capture a larger market share. Because their goods are perfect substitutes, the price-cutting firm faces the entire market demand. This continues as long as the rival's price exceeds marginal cost. In equilibrium, all the firms charge a price equal to marginal cost and earn zero economic profits.
b) The firms can enter into a collusive agreement and decide to set prices jointly. They can coordinate and act like a monopoly. In this case, each firm will charge a price equal to that charged by a monopolist. At this price, each firm will face one-third of the market demand and earn one-third of the total profit earned by a monopolist.