Question

Answer the next question based on the following payoff matrix for two oligopolistic firms in which...

Answer the next question based on the following payoff matrix for two oligopolistic firms in which the numbers indicate the profit in millions of dollars for each firm.

Firm A
High Price Low Price
Firm B High price A = $250 A = $325
B = $250 B = $200
Low price A = $200 A = $175
B = $325 B = $175

If the two firms collude to maximize joint profits, there will be

Multiple Choice

  • an incentive for firm B to cheat and earn more if firm A does not switch strategies.

  • incentives for both firm A and firm B to cheat.

  • an incentive for firm A to cheat and earn more if firm B does not switch strategies.

  • no incentive for either firm A or firm B to cheat.

Business   Economics   
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Homework Answers

Answer #1

When both collude to maximize joint Profit.

One choose high and second one choose low price ,( 325,200) or (200,325)

Let say B charging high and A charging low : upper right corner

Given firm B is still charging high price ,so firm A has no INCENTIVE to cheat because if he change move and charge high, his payoff will decrease to 250 And same for firm B, if it changes its move then his payoff will decrease to 175.

So no firm has INCENTIVE to change their strategy

Option D is correct.

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