Suppose that two mining companies, Australian Minerals Company (AMC) and South African Mines, Inc. (SAMI), control the only sources of a rare mineral used in making certain electronic components. The companies have agreed to form a cartel to set the (profit-maximizing) price of the mineral. Each company must decide whether to abide by the agreement (i.e., not offer secret price cuts to customers) or not abide (i.e., offer secret price cuts to customers). If both companies abide by the agreement, AMC will earn an annual profit of $36 million and SAMI will earn an annual profit of $24 million from sales of the mineral. If AMC does not abide and SAMI abides by the agreement, then AMC earns $48 million and SAMI earns $6 million. If SAMI does not abide and AMC abides by the agreement, then AMC earns $12 million and SAMI earns $36 million. If both companies do not abide by the agreement, then AMC earns $18 million and SAMI earns $12 million. Complete the following payoff matrix using the previous information. AMC Abide $ Not Abide $ Abide million, $ million, $ SAMI's dominant strategy is SAMI million $ million $ Not Abide million, $ million, $ In the absence of a binding and enforceable agreement, AMC's dominant strategy is to million million If the two firms can enter into a binding and enforceable agreement, AMC would chooose to and SAMI would choose to
Suppose that two mining companies, Australian Minerals Company (AMC) and South African Mines, Inc. (SAMI), control the only sources of a rare mineral used in making certain electronic components. The companies have agreed to form a cartel to set the (profit-maximizing) price of the mineral. Each company must decide whether to abide by the agreement (i.e., not offer secret price cuts to customers) or not abide (i.e., offer secret price cuts to customers). If both companies abide by the agreement, AMC will earn an annual profit of $36 million and SAMI will earn an annual profit of $24 million from sales of the mineral. If AMC does not abide and SAMI abides by the agreement, then AMC earns $48 million and SAMI earns $6 million. If SAMI does not abide and AMC abides by the agreement, then AMC earns $12 million and SAMI earns $36 million. If both companies do not abide by the agreement, then AMC earns $18 million and SAMI earns $12 million. Complete the following payoff matrix using the previous information. AMC Abide $ Not Abide $ Abide million, $ million, $ SAMI's dominant strategy is SAMI million $ million $ Not Abide million, $ million, $ In the absence of a binding and enforceable agreement, AMC's dominant strategy is to million million If the two firms can enter into a binding and enforceable agreement, AMC would chooose to and SAMI would choose to
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that two mining companies, Australian Minerals Company (AMC) and South African Mines, Inc. (SAMI), control the only sources of a rare
mineral used in making certain electronic components. The companies have agreed to form a cartel to set the (profit-maximizing) price of the mineral.
Each company must decide whether to abide by the agreement (i.e., not offer secret price cuts to customers) or not abide (i.e., offer secret price cuts
to customers).
If both companies abide by the agreement, AMC will earn an annual profit of $36 million and SAMI will earn an annual profit of $24 million from sales
of the mineral. If AMC does not abide and SAMI abides by the agreement, then AMC earns $48 million and SAMI earns $6 million. If SAMI does not
abide and AMC abides by the agreement, then AMC earns $12 million and SAMI earns $36 million. If both companies do not abide by the agreement,
then AMC earns $18 million and SAMI earns $12 million.
Complete the following payoff matrix using the previous information.
AMC
Abide
Not Abide $
Abide
SAMI's dominant strategy is
million, $
million, $
SAMI
million $
million $
Not Abide
million,
$
million, $
In the absence of a binding and enforceable agreement, AMC's dominant strategy is to
million
million
If the two firms can enter into a binding and enforceable agreement, AMC would chooose to
and SAMI would choose to
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