Consider a small town with two competing restaurants: Doug’s Diner and Betty’s Bistro. There is 1000 profit to be made in the market. Each period, the restaurants simultaneously decide whether to offer high or low quality food. In order to offer high quality food, each restaurant must hire an expert chef, which incurs an additional cost of 100. The restaurants split the profit equally if they offer the same quality of food. If one restaurant offers high quality food while the other offers low quality food, the high quality restaurant takes four fifths of the profit and the low quality restaurant takes one fifth of the profit. (a) Draw up the normal form game matrix, showing the players, strategies, and payoffs. (b) Determine the Nash equilibrium of this game. (c) Explain how the restaurant owners could both be better off than in the Nash equilibrium if they were able to cooperate. Is the town as a whole better off or worse off when the firms cooperate? Why or why not
Consider a small town with two competing restaurants: Doug’s Diner and Betty’s Bistro. There is 1000
profit to be made in the market. Each period, the restaurants simultaneously decide whether to offer high or
low quality food. In order to offer high quality food, each restaurant must hire an expert chef, which incurs
an additional cost of 100. The restaurants split the profit equally if they offer the same quality of food. If
one restaurant offers high quality food while the other offers low quality food, the high quality restaurant
takes four fifths of the profit and the low quality restaurant takes one fifth of the profit.
(a) Draw up the normal form game matrix, showing the players, strategies, and payoffs.
(b) Determine the Nash equilibrium of this game.
(c) Explain how the restaurant owners could both be better off than in the Nash equilibrium if they were
able to cooperate. Is the town as a whole better off or worse off when the firms cooperate? Why or why
not
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