Source DThe other supermarket chain in Country A, Supermarket Chain 2, must now decide if it will followthe decision of Supermarket Chain 1 to hold the price of frozen fries at P1 and set buyer limits.The following payoff matrix shows the revenue ($billion) that each supermarket chain can makewhen it chooses between:• holding price and setting buyer limits• not holding price and not setting buyer limitsSupermarket Chain 1Hold price andset buyer limitsNot hold price andnot set buyer limitsSupermarketChain 2Hold price andset buyer limits1.92.01.72.3Not hold price andnot set buyer limits2.12.21.82.4(g) (i) Use game theory to explain the likely action of Supermarket Chain 2._____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (2 marks)(ii) Explain why Supermarket Chain 2 must consider the actions of Supermarket Chain 1when deciding whether to hold prices and set buyer limits._____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (2 marks)

page 6 of 10Source CConsumers who purchase frozen fries from supermarkets have also been affected by the changesin the market for frozen fries. Supermarket Chain 1, one of Country A’s two supermarket chains,has chosen to hold the price of frozen fries at P1 and has also set buyer limits to help availabilityand affordability for customers.(f ) (i) Use the following diagram to identify the impact on both consumer surplus and producersurplus of Supermarket Chain 1’s decision to hold prices at P1. Write your answer in thetable below.Market for frozen fries at supermarket chainsPP2PeP1 P1Sab cd e f gh i j k l DQQ 2Q eQ 1Consumer surplus if price is Pe Consumer surplus if price is P1Producer surplus if price is Pe Producer surplus if price is P1

Explain how the price mechanism would impact both producers and consumers to returnthe market for frozen fries to equilibrium.

Referring to intended and unintended consequences, assess the likely effectiveness ofSupermarket Chain 1’s decision to hold prices at P1 and set buyer limits.

Explain the impact of an increase in the price of frozen fries from P0 to P1 on the totalrevenue of processors of frozen fries. Refer to the diagram below in your answer.Demand for frozen fries from family restaurantsQQ 1 Q 0PP1P0abdce f D_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (3 marks)

Explain the likely market structure of the supermarket industry.