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 Flashfry Pricing High 11, 11 2, 15 Low 15, 2 8, 8 For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $15 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 price, and if Flashfry prices low, Warmbreeze will make more profit if it chooses a price. If Warmbreeze prices high, Flashfry will make more profit if it chooses a price, and if Warmbreeze prices low, Flashfry will make more profit if it chooses a price. 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? Flashfry will choose a low price, and Warmbreeze will choose a high price. Flashfry will choose a high price, and Warmbreeze will choose a low price. Both Flashfry and Warmbreeze will choose a low price. Both Flashfry and Warmbreeze will choose a high price. True or False: The game between Flashfry and Warmbreeze is not an example of the prisoners’ dilemma. True False

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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
Flashfry Pricing	High	11, 11	2, 15
Low	15, 2	8, 8

For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $15 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 price, and if Flashfry prices low, Warmbreeze will make more profit if it chooses a price.

If Warmbreeze prices high, Flashfry will make more profit if it chooses a price, and if Warmbreeze prices low, Flashfry will make more profit if it chooses a price.

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?

Flashfry will choose a low price, and Warmbreeze will choose a high price.

Flashfry will choose a high price, and Warmbreeze will choose a low price.

Both Flashfry and Warmbreeze will choose a low price.

Both Flashfry and Warmbreeze will choose a high price.

True or False: The game between Flashfry and Warmbreeze is not an example of the prisoners’ dilemma.

True

False

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