Question

Seclusion BaySeclusion Bay has two car wash companiescar wash companies?, one owned by CheriCheri and the other owned by LeonLeon. Suppose that CheriCheri and LeonLeon have two? strategies: to? collude, fix the monopoly? price, and limit the number of car washescar washes?, or to break the?collusion, cut the? price, and produce more car washescar washes. ?? The table gives the payoff matrix? (in dollars) for the game that CheriCheri and LeonLeon play.

CheriCheri?'s strategies ?(red squares) LeonLeon?'s strategies ?(blue squares) ?????????????Collude ???????????? Don't collude Collude 22.5022.50 36.0036.00 22.5022.50 negative 11.25?11.25 ?Don't collude negative 11.25?11.25 0 36.0036.00 0

If this game is played just? once, the Nash equilibrium is that ? ______.

A.

both

CheriCheri

and

LeonLeon

break the collusion

B.

CheriCheri

colludes and

LeonLeon

breaks the collusion

C.

CheriCheri

and

LeonLeon

either collude or break the collusion but we? don't know for sure

D.

both

CheriCheri

and

LeonLeon

collude

E.

CheriCheri

breaks the collusion and

LeonLeon

colludes

The people of

Seclusion BaySeclusion Bay

receive the efficient quantity of

car washescar washes

from

CheriCheri

and

LeonLeon.

A.

True

B.

False

Answer 1

A. both LeonLeon and PeriPeri break the collusion
If LeonLeon strategy is to collude then CheriCheri's best response is to Don't collude (36.0036.00).
If LeonLeon strategy is to don't collude then CheriCheri's best response is to Don't collude (0).
If CheriCheri's strategy is to collude then LeonLeon's best response is to Don't collude (36.0036.00).
If CheriCheri's strategy is to don't collude then LeonLeon's best response is to Don't collude (0).

So, nash equilibrium of the game is both LeonLeon and PeriPeri break the collusion as best response of both companies occur simultaneously when they don't collude.
A. both LeonLeon and PeriPeri break the collusion
It gives payoff (0,0)

False
(Nash equilibrium of the game is (0,0). But they both will be better off when they both choose to collude as payoffs of both of them would increase to (22.5022.50, 22.5022.50) which implies both can be made better off without making anyone worse off. So, the nash equilibrium is not the efficient quantity of car washes).