**Problem Statement:**6. What price should firm Y charge if firm X charges $2? Why? What price should firm X charge if firm Y charges $4? Why?**Payoff Matrix Explanation:**The diagram above is a payoff matrix representing the pricing strategies of two competing firms, X and Y. Each firm can choose to charge either $2 or $4. The profits for each combination of prices are displayed in the cells where Firm X's profits are denoted by $\pi_X$ and Firm Y's profits by $\pi_Y$.- **Firm X pricing options:** $2 and $4- **Firm Y pricing options:** $3 and $4**Matrix Details:**- If Firm X charges $4 and Firm Y charges $4: - $\pi_X = 250$ - $\pi_Y = 350$- If Firm X charges $3 and Firm Y charges $4: - $\pi_X = 300$ - $\pi_Y = 150$- If Firm X charges $4 and Firm Y charges $3: - $\pi_X = 150$ - $\pi_Y = 300$- If Firm X charges $3 and Firm Y charges $3: - $\pi_X = 200$ - $\pi_Y = 200$**Analysis:**1. **If Firm X charges $2:** - To determine Firm Y's best response, we compare Firm Y's profits between charging $3 ($\pi_Y = 300$) and $4 ($\pi_Y = 350$). - Firm Y should charge $4 because it maximizes its profit ($\pi_Y = 350$ vs. $\pi_Y = 300$).2. **If Firm Y charges $4:** - We compare Firm X's profits between charging $2 ($\pi_X = 250$) and $3 ($\pi_X = 300$). - Firm X should charge $3 as it yields a higher profit ($\pi_X = 300$ vs. $\pi_X = 250$).

Answered: firm Y charges

firm Y charges

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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