a) Suppose the market for petrol in an economy is monopolised and the market supply is given by Q = 2P and the market demand is given by Q = 12 – 2P, where P is the price in dollars, Q is the quantity. Examine this market structure and solve for the equilibrium price, the equilibrium quantity, the consumer surplus, the producer surplus and the deadweight loss in the petrol market. Explain your answers with a suitable petrol market diagram. (b) Consider a small economy with only 2 banks, DSB and TKB, in the banking industry. Both banks have to decide whether to charge high or low interest rates. If both banks charge a high interest rate, DSB will earn $200m while TKB will earn $85m. If both banks charge a low interest rate, DSB will earn $250m while TKB will earn $400m. If DSB charges a higher interest rate while TKB charges a low interest rate, DSB will earn $300m while TKB will earn $65m. If DSB charges a low interest rate while TKB charges a high interest rate, DSB will earn $75m while TKB will earn $500m. Construct the payoff matrix for the earning of both banks, apply game theory concepts and solve for the Nash equilibrium and explain whether this is a prisoner’s dilemma game.
(a) Suppose the market for petrol in an economy is monopolised and the market supply is given by Q = 2P and the market demand is given by Q = 12 – 2P, where P is the price in dollars, Q is the quantity. Examine this market structure and solve for the
(b) Consider a small economy with only 2 banks, DSB and TKB, in the banking industry. Both banks have to decide whether to charge high or low interest rates. If both banks charge a high interest rate, DSB will earn $200m while TKB will earn $85m. If both banks charge a low interest rate, DSB will earn $250m while TKB will earn $400m. If DSB charges a higher interest rate while TKB charges a low interest rate, DSB will earn $300m while TKB will earn $65m. If DSB charges a low interest rate while TKB charges a high interest rate, DSB will earn $75m while TKB will earn $500m.
Construct the payoff matrix for the earning of both banks, apply
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