**The Prisoner's Dilemma in Oligopoly: Payoffs Between Two Firms**This diagram presents a classic example of the prisoner's dilemma applied to two firms, Firm A and Firm B, operating in an oligopoly market. Each firm has the option to either collude or compete, impacting their respective profits.**Diagram Details:**- **Columns:** - The top of the diagram represents Firm A’s strategies: "Collude, Produce 20m" on the left and "Compete, Produce 35m" on the right.- **Rows:** - The left side of the diagram represents Firm B’s strategies: "Collude, Produce 30m" on the top and "Compete, Produce 50m" on the bottom.**Payoff Matrix:**1. **Both Firms Collude:** - Firm A produces 20 million units, and Firm B produces 30 million units. - Payoffs: - Firm A: $200 million - Firm B: $300 million 2. **Firm A Competes, Firm B Colludes:** - Firm A produces 35 million units, Firm B produces 30 million units. - Payoffs: - Firm A: $300 million - Firm B: $170 million3. **Firm A Colludes, Firm B Competes:** - Firm A produces 20 million units, Firm B produces 50 million units. - Payoffs: - Firm A: $50 million - Firm B: $400 million 4. **Both Firms Compete:** - Firm A produces 35 million units, Firm B produces 50 million units. - Payoffs: - Firm A: $100 million - Firm B: $200 millionGiven these payoffs, one must factor in strategic decision-making to predict Firm A's profits. Consider the likelihood of each firm's strategies and how risk-averse they might be toward competition.**Question:**Given the payoffs shown, what can we predict Firm A's profits will be?1. $50 Million2. $100 Million3. $300 Million4. $200 Million

The Prisoner's Dilemma is a concept in game theory that illustrates a situation where two individuals, acting in their own self-interest, do not produce the most optimal outcome for both. It is a hypothetical scenario often used to analyze the concepts of cooperation and competition.To find the outcome of this game, let us find the Nash equilibrium. To find the Nash equilibrium best responses of the players will be marked. An outcome where payoffs of both the players are marked will be the Nash equilibrium. In this given matrix best responses of both the players is highlighted in yellow.Explanation of the above matrix:If firm B chooses to collude then the best response of firm A is to compete because it gives higher payoff ($300>$200, see row one). If firm B chooses to compete then the best response of firm A is again to compete because it gives higher payoff ($100>$50, see row two). If the firm A chooses to collude then the best response of firm B is to compete because it gives higher payoff ($400>$300, see column one). If the firm A chooses to compete then the best response of firm B is to compete because it gives higher payoff ($200>$170, see column two). The outcome of this game will be where the payoffs of both firms are marked. So the outcome of this game is to (compete, compete). Hence, firm A's profit will be $100million.Firm A's profit will be $100million.

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The prisoner's dilemma shown displays the payoffs associated with two firms: Firm A and Firm B. These firms are in an oligopoly and they can choose to either collude or compete FIRM B Collude Produce 20m Collude Produce 30m B: $300m profits A: $200m profits 1. $50 Million 2. $100 Million 3. $300 Million 4. $200 Million FIRM A Compete Produce 50m B: $400m profits A: $50m profits Compete Produce 35m Given the payoffs shown, what can we predict Firm A's profits will be? A: $300m profits B: $170m profits A: $100m profits B: $200m profits

The prisoner's dilemma shown displays the payoffs associated with two firms: Firm A and Firm B. These firms are in an oligopoly and they can choose to either collude or compete FIRM B Collude Produce 20m Collude Produce 30m B: $300m profits A: $200m profits 1. $50 Million 2. $100 Million 3. $300 Million 4. $200 Million FIRM A Compete Produce 50m B: $400m profits A: $50m profits Compete Produce 35m Given the payoffs shown, what can we predict Firm A's profits will be? A: $300m profits B: $170m profits A: $100m profits B: $200m profits

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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