1. A Price War 1.A consider a pair of duopolists engaged in price competition. Suppose that each shop duopolist can produce output at a cost of $4 per unit: AC=MC=$4. Furthermore, each film has only two pricing options: charge a high price of $8 or charge a low price of $6 . If both firms Sets high prices, each can expect to sell 2.5 million units annually. If both set low prices , each firms sales increase to 3.5 million units. Finally, if one firm sets a high price and the other a low price, the former sells 1.25 million units , the latter 6 million units. show a payoff table summarizing the profit implications of the firms different pricing strategies.

1.B Suppose that some consumers display a strong brand allegiance for one firm or the consequently, any price difference between the duopolists is expected to produce a much smaller swing in the firms’ market shares. Specifically , suppose that if one firm changes a price of $6 and the other $8, the former sells 4 million units and the latter 2 million (instead of the original 6 million and 1.25 million sales). All other facts are as before. How does this change the payoffs? What price should each firm set? Explain.