There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options:
i. They continue to collude (no cheating) and make 12 million each in profits.
ii. One firm cheats and the other does not. The firm that cheats makes a profit of 14 million whereas the firm that doesn't makes a profit of 9 million.
iii. They both cheat and each firm makes a profit of 7 million.
a. Construct a payoff matrix for these two firms.
b. How does this situation relate to the prisoner's dilemma?
c. If each firm acted noncooperatively, how much profit would each make?
d. Are the firms better off colluding (with no cheating) or competing? Explain.
Question 2
Actual investment spending does not include
A) spending on consumer durable goods. B) spending on new houses.
C) spending on new capital equipment. D) changes in inventories.
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