This problem set is due Tuesday, December 10, at the beginning of the class period. Problem sets done on notebook paper or unstapled will not be accepted. Late problem sets are unacceptable also.

1. Downtown Hollywood has two restaurants competing with each other for business: Tiffany's and Shooters. The owners of each restaurant are trying to decide what price to charge for their new breakfast buffet. Each of the two owners (Todd Pipes owns Tiffany's, while Jake Hanson owns Shooters) could charge either $12.00 or $8.00. If both charge $12.00, each of them makes a profit of $15,000 per month. If Tiffany's charges $8.00, while Shooters charges $12.00, then Tiffany's makes a $25,000 profit while Shooters only makes a $1,000 profit. If Shooters charges $8.00, while Tiffany's charges $12.00, then Shooters has $25,000 profits, while Tiffany's has $1,000 in profits. Finally, if both restaurants charge $8.00, each of them makes a $6,000 profit.

a) Provide the payoff table for the buffet price decision of Tiffany's and Shooters.

b) If Todd does not know what Shooters's price will be, what is Tiffany's optimal price?

c) If Jake does not know what Tiffany's price will be, what is Shooters's optimal price?

d) What is the Cournot-Nash solution for this problem? Explain.

e) What is the tacit collusive solution for this problem? Explain.

2. Blackjack Pizza is in the pizza home delivery business. This industry presents the characteristics of monopolistic competition.

a) You are told that Blackjack Pizza and all of its competitors are losing money during this year. Draw a diagram illustrating the profit maximizing (or loss minimizing) output of Blackjack Pizza today.

b) What would happen in the long run in this industry? Show the long run changes and long run equilibrium in the diagram that you drew for part a) (You should assume that Blackjack Pizza stays open in the long run).

c) After being in long run equilibrium for a number of years, Blackjack Pizza decides to promote its product by giving away trips to Monaco to some lucky customers and by advertising on National TV. Draw a new diagram showing the changes that a successful promotional campaign would produce for Blackjack Pizza.

d) Does the equilibrium that you found for part c) represent a long run equilibrium? Explain.

3. Suppose that the following data represent the demand and supply schedules in a perfectly competitive industry.

a) What are the equilibrium price and quantity in this perfectly competitive market?

b) Suppose that a perfect cartel forms in this industry. What are the equilibrium price and quantity in this industry once the cartel starts functioning?

4. The market structure of the "fifth-generation" computer chip industry is of the "Dominant-Firm" Oligopoly type. Dr. Rebecca Lewis, the vice-president of finance of Intel Corp. (the largest and dominant firm in the "fifth-generation" computer chip industry) gives you the following information:

where: P = Price; Qd = Market demand; Qss = Supply of small firms in the industry; and TC = Total cost of Intel Corp.

a) Dr. Rebecca Lewis tells you that Intel Corp. has decided to behave as a "Dominant-Firm" Oligopolist. She asks you to find Intel's profit maximizing output and price.

b) How much profit will Intel Corp. make at the level of output that you suggested in part a)?

c) What is the market share of Intel Corp. if it decides to produce at its profit maximizing output?

d) If the "fifth-generation" computer chip industry has 5 companies, Intel Corp. and 4 small identical firms, what is the value of Herfindahl Index for this industry when Intel Corp. maximizes profits as a "Dominant-Firm" Oligopolist? What is the value of the 4-Firm Concentration Ratio?