Assume that in a price-fixing game, if Player A breaks the agreement in the first year, she earns 11 while Player B earns 5 . However, if Player A breaks the agreement once, Player B decides to break the agreement for eternity, leaving each to receive 8 per year for the rest of their lives. If they both keep the agreement each receives 9 per year for the rest of their lives. If the discount rate is 30 percent per period:
a. Player A will prefer to break the agreement in the first year.
b. Player A will prefer to break the agreement in the second year.
c. Player A will prefer to keep the agreement throughout her life.
d. Player A will prefer to keep the agreement only for the first five years.
Question 2
A monopolistically competitive firm:
a. tries to differentiate its product from the products of competitors.
b. faces a perfectly elastic demand curve for its product.
c. unlike a perfectly competitive firm, is able to earn positive economic profits in the long run.
d. is always a retail establishment.
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