From the following payoff matrix, where the payoffs are the profits or losses of the two...

From the following payoff matrix, where the payoffs are the profits or losses of the two firms, determine (a) whether Firm A has a dominant strategy, (b) whether Firm B has a dominant strategy, and (c) the optimal strategy for each firm. Explain. Firm B Low price High price Firm A Low price (1, 1) (3, -2) High price (-2, 3) (2, 2) Prisoner’s Dilemma

Solutions

Expert Solution

Solution-

A. whether Firm A has a dominant strategy

No, doesn't have a dominant strategy. When firm B charges a low price, firm A will earn a profit of 1 when it also charges a low price and a profit of ?1 (i.e., a loss of 1) when it charges a high price. When firm B charges a high price, firm A earns a profit of 3 when it charges a low price and a profit of 4 when it charges a high price. Therefore, firm A does not have a dominant strategy.

B. Whether Firm B has a dominant strategy

Has a dominant strategy of low price When firm A charges a low price, firm B earns a profit of 1 when it also charges a low price and a profit of ?1 when it charges a high price. Similarly, when firm A charges a high price, firm B earns a profit of 3 when it charges a low price and a profit of 2 when it charges a high price. Therefore, charging a low price is the dominant strategy for firm B.

C. The optimal strategy for each firm.

The optimal strategy for firm B is its dominant strategy of charging a low price. The optimal strategy for firm A is a low price, given that firm B will charge a low price.

Prisoner’s Dilemma

The firm's face prisoner's dilemna because the option that creates the best profit payoff is for both firms to choose a high price strategy. However, neither firm can trust the other firm to charge a high price, so they choose their best or dominant strategy instead. Each firm could do better (earn higher profitts) if they both choose high price.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Mammoths payoffs (profit) are shown in the lower half of each cell in the payoff matrix...

Mammoths payoffs (profit) are shown in the lower half of each cell in the payoff matrix below. Is this a zero-, negative-, or positive-sum game? What is each airline’s profit if Mammoth discount and Colossal doesn’t? If the airlines cooperate, which strategy is each likely to choose? In the absence of cooperation, does each player have a dominant strategy? Explain. What effect would it have on each player’s likely strategy that the game is to be repeated many times? Mammoth...

The payoff matrix below shows how annual profits of two major computer sellers, Dell and Sony,...

The payoff matrix below shows how annual profits of two major computer sellers, Dell and Sony, will vary with and without advertising. a. Are there dominant strategies for both firms? Explain. b. What is the Nash equilibrium? c. Is this game a prisoner’s deliema? Dell’s strategies Advertise Don’t Advertise Sony’s strategies Advertise Dell’s profit: 12 million Sony’s profit: 20 million Dell’s profit: 6 million Sony’s profit: 28 million Don’t Advertise Dell’s profit: 18 million Sony’s profit: 14 million Dell’s profit:...

1. Use a payoff matrix to illustrate a two player, two strategy playoff game where the...

1. Use a payoff matrix to illustrate a two player, two strategy playoff game where the nash equilibrium is not the social optimum?

The following matrix shows strategies and payoffs for two firms that must decide how to price...

The following matrix shows strategies and payoffs for two firms that must decide how to price their products. Firm 1 _____________________________________________________________________________________ Price High Price Low Firm 2 Price High 200. 200 50, 300 Price Low 300, 50 120, 120 Is there a dominant strategy? If so, what is it? Is there a Nash equilibrium? If so, what is it? Is this a Prisoner’s Dilemma Game? Why? Suppose MC = $10. Given each of the following price elasticities compute...

In the following matrix for the profits of two pizza firms with the decision whether or...

In the following matrix for the profits of two pizza firms with the decision whether or not to offer “free delivery” what is the dominant outcome. Use the check mark system to explain why. You deliver You don’t deliver Rival delivers Rival gets $3000 You get $3000 Rival gets $5000 You get $4000 Rival doesn’t deliver Rival gets $4000 You get $5000 Rival gets $6000 You get $6000

The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously...

The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously decide on various advertising budgets ($1 million, $2 million, or $3 million): Blank for Formatting Pizza Hut Advertising Budget: $1 mill Pizza Hut Advertising Budget: $2 mill Pizza Hut Advertising Budget: $3 mill Papa John's Advertising Budget: $1 mill $225/$175 $215/$185 $210/$180 Papa John's Advertising Budget: $2 mill 235/165 210/170 205/175 Papa John's Advertising Budget: $3 mill 215/155 205/160 200/165 QUESTION: What would be...

Consider the following payoff matrix for two firms, Airbus (A) and Boeing (B). The firms can...

Consider the following payoff matrix for two firms, Airbus (A) and Boeing (B). The firms can each produce either 3 or 4 planes per week. The table below shows the profit from each of those options. Each firm knows all the information in the table below. They each make their decisions independently. Airbus's Options 4 planes per week 3 planes per week Boeing's Options 4 planes per week A = $32 million B = $32 million A = $30 million...

b) he following matrix describes the payoffs of two countries (China and the US) whenthey decide...

b) he following matrix describes the payoffs of two countries (China and the US) whenthey decide for protectionism or free trade. In each cell of the matrix, the first numberdenotes the payofffor the US and the second number denotes the payofffor China. b1) Based on the above matrix, explain why countries might end up in a trade war without trade agreements.(3 pts) b2) Based on the above matrix, discuss the following statement:“International trade agreements can solve the Prisoner’s dilemma that...

The following payoff matrix represents a single-period, simultaneous move game to be played by two firms....

The following payoff matrix represents a single-period, simultaneous move game to be played by two firms. Show all the best responses for each player by placing checkmarks next to each payoff that reflects a best response choice. Does Firm A have a dominant strategy and if so, what is it? Does Firm B have a dominant strategy and if so, what is it? Does a Nash Equilibrium (or multiple NE) exist for this game and if so, what is it...

Assume there are two newspaper companies, New York Times and Washington Post. Given following payoff matrix...

Assume there are two newspaper companies, New York Times and Washington Post. Given following payoff matrix of simultaneous game, answer the questions. WP NYT scandal Crisis Scandal 20, 40 60, 40 crisis 40, 70 50 , 100 What are the strategies each newspaper can choose? How would you solve this game? Describe the method and solution. (ex. Dominant strategy, (scandal, scandal)) Describe one example of natural monopoly.

Subjects