Two firms operating under oligopoly are faced with two choices, to charge a high price or a low price. If one firm charges a low price while the other a high price, the firm that charges a low price attracts customers and earns a profit of K600,000 while the firm charging a high price loses customers and earns only K100,000. If both firms charge a high price they earn K400,000 each while the both charge a low price, they earn K200,000 each. a) What profits are the firms likely to earn in the absence of cooperation? b) If the firms cooperated, what profits would each one earn? c) The demand curve facing a firm operating under monopoly is given by P = 170 – 5Q; The cost function is given by TC = 40 + 50Q + 5Q² i. What is the maximum profit? i. What is the profit maximizing price elasticity of demand? ii. What is the revenue maximizing price elasticity of demand?

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