Keep Quota Firm Y Cheat 2 Keep X profit $25,000 X profit--$2,000 Quota Y profit $25,000 Y profit - $50,000 Firm X 3 4 X profit $50,000 X profit - $0 Cheat Y profit --$2,000 Y profit -$0 5. (17) Consider the payoff matrix above for a Cartel Game. Each firm has to decide to stick to the agreement or cheat. They start out by both keeping the quota. This is a repeated game (with no end to the game so these are the profits for only one given year but will continue infinitely into the future) and firms can communicate with one another. Each firm must decide each year to either keep the quota or cheat and earn the profit in the equilibrium box for that year (and subsequent years). In this situation will firms have an incentive to cheat? Explain why or why not.

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Solve for the Nash equilibrium (or equilibria) in each of the following games. (a) The following two-by-two game is a little harder to solve since firm 2’spreferred strategy depends of what firm 1 does. But firm 1 has a dominantstrategy so this game has one Nash equilibrium.                                         Firm 2                                 Launch       Don’tFirm 1      Launch     60, -10      100, 0                  Don’t       80, 30      120, 0 What is the Nash equilibrium of this simultaneous-move game? (b) What would the outcome of this game be if instead firm 1 moved first and then, after seeing what firm 1 chose, firm 2 chose it strategy? In this case firm 1 doesn’t necessarily need to choose a best response, but firm 2 must choose a best response since it moves second.

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