There are two mobile phone firms operating in a market; FF (Firm 1) and Wodaphone (Firm 2). The market demand is PP = 75 â 0.5(1 + 2). The total costs for the two firms are 301 and 302.
(a) If either FF or Wodaphone enjoyed a monopoly position in this market, what level of output would they produce?
(b) Using a diagram, fully labelled, describe how the equilibrium outputs for the two firms are determined and solve mathematically for this solution.
(c) The CEO of FF meets with her counterpart at Wodaphone and suggests that the two firms each produce 22.5 units. The CEO of Wodaphone accepts this suggestion. Why did the CEO of FF make this suggestion, and why did her counterpart at Wodaphone agree? Show this outcome on your diagram in (b).
(d) After keeping to this agreement for 12 months, the CEO of Wodaphone notices that FF is actually producing more than 22.5 units. Why is FF doing this? Illustrate this on your diagram in (b). What action can Wodaphone take against FF?
