Suppose there are only two firms that sell tablets: Padmania and Capturesque. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its tablets. Capturesque Pricing High Low Padmania Pricing High 9, 9 3, 15 Low 15, 3 7, 7 For example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $15 million, and Capturesque will earn a profit of $3 million. Assume this is a simultaneous game and that Padmania and Capturesque are both profit-maximizing firms. If Padmania prices high, Capturesque will make more profit if it chooses a price, and if Padmania prices low, Capturesque will make more profit if it chooses a price. If Capturesque prices high, Padmania will make more profit if it chooses a price, and if Capturesque prices low, Padmania will make more profit if it chooses a price. Considering all of the information given, pricing high a dominant strategy for both Padmania and Capturesque. If the firms do not collude, what strategies will they end up choosing? Padmania will choose a low price, and Capturesque will choose a high price. Both Padmania and Capturesque will choose a low price. Padmania will choose a high price, and Capturesque will choose a low price. Both Padmania and Capturesque will choose a high price. True or False: The game between Padmania and Capturesque is 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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. Using a payoff matrix to determine the equilibrium outcome

Suppose there are only two firms that sell tablets: Padmania and Capturesque. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its tablets.

	Capturesque Pricing
High	Low
Padmania Pricing	High	9, 9	3, 15
Low	15, 3	7, 7

For example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $15 million, and Capturesque will earn a profit of $3 million. Assume this is a simultaneous game and that Padmania and Capturesque are both profit-maximizing firms.

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

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

Considering all of the information given, pricing high a dominant strategy for both Padmania and Capturesque.

If the firms do not collude, what strategies will they end up choosing?

Padmania will choose a low price, and Capturesque will choose a high price.

Both Padmania and Capturesque will choose a low price.

Padmania will choose a high price, and Capturesque will choose a low price.

Both Padmania and Capturesque will choose a high price.

True or False: The game between Padmania and Capturesque is an example of the prisoners’ dilemma.

True

False

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