LuLu Restaurant (LR) and Lucy Café (LC) have an implicit agreement to keep prices high so that both can earn $30,000 profit a year. Below is their complete payoff matrix in terms of thousands of dollars of profit per year and strategic actions a and b. LR’s payoffs are the left and LC’s are on the right. However, in 2014 new owner/managers have taken over both LR and LC and have to decide whether to abide by the implicit agreement or to cheat. LC a b LR a 30, 30 25,32 b 32, 25 26, 26 What strategy will each firm choose and what will be its profit? Is this a Nash equilibrium? Why or why not? Would it be worth it for these new owners/managers to find reach an accommodation and go back to the old implicit agreement? Would this be a Nash equilibrium? Why or why not? Is this game a prisoner’s dilemma? Why or why not?
LuLu Restaurant (LR) and Lucy Café (LC) have an implicit agreement to keep prices high so that both can earn $30,000 profit a year. Below is their complete payoff matrix in terms of thousands of dollars of profit per year and strategic actions a and b. LR’s payoffs are the left and LC’s are on the right. However, in 2014 new owner/managers have taken over both LR and LC and have to decide whether to abide by the implicit agreement or to cheat. LC a b LR a 30, 30 25,32 b 32, 25 26, 26 What strategy will each firm choose and what will be its profit? Is this a Nash equilibrium? Why or why not? Would it be worth it for these new owners/managers to find reach an accommodation and go back to the old implicit agreement? Would this be a Nash equilibrium? Why or why not? Is this game a prisoner’s dilemma? Why or why not?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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- LuLu Restaurant (LR) and Lucy Café (LC) have an implicit agreement to keep prices high so that both can earn $30,000 profit a year. Below is their complete payoff matrix in terms of thousands of dollars of profit per year and strategic actions a and b. LR’s payoffs are the left and LC’s are on the right. However, in 2014 new owner/managers have taken over both LR and LC and have to decide whether to abide by the implicit agreement or to cheat.
LC | ||||||
a | b | |||||
LR | a | 30, 30 | 25,32 | |||
b | 32, 25 | 26, 26 |
- What strategy will each firm choose and what will be its profit?
- Is this a Nash equilibrium? Why or why not?
- Would it be worth it for these new owners/managers to find reach an accommodation and go back to the old implicit agreement?
- Would this be a Nash equilibrium? Why or why not?
- Is this game a prisoner’s dilemma? Why or why not?
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