Question

) Use the table below to answer the following questions.

Table 2



Table 2 gives the payoff matrix in terms of economic profit for firms A and B when there are two strategies facing each firm: (1) charge a low price, or (2) charge a high price.

a) why the equilibrium in this game (played once) is a dominant strategy equilibrium ?
b) In Nash equilibrium, what the economic profit firm A makes ?
c) If both firms could successfully collude, what would be firm A's economic profit?

4) Use the table below to answer the following questions. Table 2 Firm B Lower Prices Higher Prices A: $2 A: $20 B: $5 B: -S10 Lower Prices Firm A Higher Prices A:-$10 B: $25 A: $10 B: $20 Table 2 gives the payoff matrix in terms of economic profit for firms A and B when there are two strategies facing each firm: (1) charge a low price, or (2) charge a high price a) why the equilibrium in this game played once) is a dominant strategy equilibrium b) In Nash equilibrium, what the economic profit firm A makes? c) If both firms could successfully collude, what would be firm A's economic profit? 5) Use the figure below to answer the following questions. Price and cost (dollars per unit)

Answer 1

A Lower puce A2 l 1 Highes s Bruce Bi 5_ A:20 B: -10 Lower 9 .39 Pruce Higue Ao-10 B: 25 Ar 10 Bi 20 Cascanned with CamScanner

A) when firm B chooses lower price, firm A will also choose lower price because 2>-10
When firm B chooses higher price, firm A will choose lower price because 20>10.
Dominant strategy of A is to choose Lower price in both the case.
Similarly, when firm A chooses lower price, firm B will also choose lower price because 5>-10
When firm A chooses higher price, firm B will choose lower price because 25>20.
Dominant strategy of A is to choose Lower price in both the case.
Nash equilibrium is then- (lower price by A, lower price by B).

The equilibrium is a dominant strategy Nash equilibrium because if both the firms set higher prices, they will get higher profits but there is a chance that the other firm cheats by setting lower price and in hope of getting even higher profit, thereby incurring loses for the firm which doesnt cheat and sets higher profits. Hence, both the firms will play safe and set lower prices thereby lower price is their dominant strategies.

B) in Nash equilibrium, firm A makes a profit of $2

C) if both firms collude, they will set higher price. Equilibrium would be (high price by A, high price by A).
Firms A's economic profit = $10

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