Question

Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price:

		Big Brew
		High Price	Low Price
Little Kona	Enter	$2 million, $3 million	-$2 million, $1 million
	Don’t Enter	$0, $8 million	$0, $3 million

True or False: Only Big Brew has a dominant strategy of maintaining a high price in this game.

Which of the following outcomes represent a Nash equilibrium in this case? Check all that apply.

Big Brew maintains a low price and Little Kona enters.

Big Brew maintains a low price and Little Kona does not enter.

Big Brew maintains a high price and Little Kona does not enter.

Big Brew maintains a high price and Little Kona enters.

Big Brew threatens Little Kona by saying, “If you enter, we’re going to set a low price, so you had better stay out.”

True or False: Little Kona should not believe the threat.

If the two firms could collude and agree on how to split the total profits, what outcome would they pick?

Big Brew maintains a low price and Little Kona does not enter.

Big Brew maintains a high price and Little Kona enters.

Big Brew maintains a low price and Little Kona enters.

Big Brew maintains a high price and Little Kona does not enter.

Answer 1