6. Using a payoff matrix to determine the equilibrium outcome Suppose that Flashfry and Warmbreeze are the only two firms in a hypothetical market that produce and sell air fryers. The following payoff matrix gives profit scenarios for each company (in millions of dollars), depending on whether it chooses to set a high or low price for fryers. Warmbreeze Pricing High Low High 11,11 2,18 Flashfry Pricing Low 18,2 10, 10 For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $18 million, and Warmbreeze will earn a profit of $2 million. Assume this is a simultaneous game and that Flashfry and Warmbreeze are both profit-maximizing firms. If Flashfry prices high, Warmbreeze will make more profit if it chooses a chooses a price. price, and if Flashfry prices low, Warmbreeze will make more profit if it If Warmbreeze prices high, Flashfry will make more profit if it chooses a chooses a price. price, and if Warmbreeze prices low, Flashfry will make more profit if it Considering all of the information given, pricing low a dominant strategy for both Flashfry and Warmbreeze. If the firms do not collude, what strategies will they end up choosing? Both Flashfry and Warmbreeze will choose a high price. Flashfry will choose a high price, and Warmbreeze will choose a low price. Flashfry will choose a low price, and Warmbreeze will choose a high price. Both Flashfry and Warmbreeze will choose a low price. True or False: The game between Flashfry and Warmbreeze is an example of the prisoners' dilemma. True False
6. Using a payoff matrix to determine the equilibrium outcome Suppose that Flashfry and Warmbreeze are the only two firms in a hypothetical market that produce and sell air fryers. The following payoff matrix gives profit scenarios for each company (in millions of dollars), depending on whether it chooses to set a high or low price for fryers. Warmbreeze Pricing High Low High 11,11 2,18 Flashfry Pricing Low 18,2 10, 10 For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $18 million, and Warmbreeze will earn a profit of $2 million. Assume this is a simultaneous game and that Flashfry and Warmbreeze are both profit-maximizing firms. If Flashfry prices high, Warmbreeze will make more profit if it chooses a chooses a price. price, and if Flashfry prices low, Warmbreeze will make more profit if it If Warmbreeze prices high, Flashfry will make more profit if it chooses a chooses a price. price, and if Warmbreeze prices low, Flashfry will make more profit if it Considering all of the information given, pricing low a dominant strategy for both Flashfry and Warmbreeze. If the firms do not collude, what strategies will they end up choosing? Both Flashfry and Warmbreeze will choose a high price. Flashfry will choose a high price, and Warmbreeze will choose a low price. Flashfry will choose a low price, and Warmbreeze will choose a high price. Both Flashfry and Warmbreeze will choose a low price. True or False: The game between Flashfry and Warmbreeze is an example of the prisoners' dilemma. True False
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:6. Using a payoff matrix to determine the equilibrium outcome
Suppose that Flashfry and Warmbreeze are the only two firms in a hypothetical market that produce and sell air fryers. The following payoff matrix
gives profit scenarios for each company (in millions of dollars), depending on whether it chooses to set a high or low price for fryers.
Warmbreeze Pricing
High
Low
High
11,11
2,18
Flashfry Pricing
Low
18,2
10, 10
For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $18 million, and
Warmbreeze will earn a profit of $2 million. Assume this is a simultaneous game and that Flashfry and Warmbreeze are both profit-maximizing firms.
If Flashfry prices high, Warmbreeze will make more profit if it chooses a
chooses a
price.
price, and if Flashfry prices low, Warmbreeze will make more profit if it
If Warmbreeze prices high, Flashfry will make more profit if it chooses a
chooses a
price.
price, and if Warmbreeze prices low, Flashfry will make more profit if it
Considering all of the information given, pricing low
a dominant strategy for both Flashfry and Warmbreeze.
If the firms do not collude, what strategies will they end up choosing?
Both Flashfry and Warmbreeze will choose a high price.
Flashfry will choose a high price, and Warmbreeze will choose a low price.
Flashfry will choose a low price, and Warmbreeze will choose a high price.
Both Flashfry and Warmbreeze will choose a low price.
True or False: The game between Flashfry and Warmbreeze is an example of the prisoners' dilemma.
True
False
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