The two largest cigarette producers are Phillip Morris and R. J. Reynolds. Both are considering whether to increase their price for a pack of cigarettes or keep the price unchanged. The relevant factors to consider are: 1) demand for cigarettes is inelastic, so if both firms raise prices they will increase their revenue, and 2) if one raises price and the other doesn't, they will lose market share to their rival R. J. Reynolds Increase No change Increase R: 500 million R: 400 million P: 600 million P: 300 million Phillip Morris No change R: 200 million R: 300 million P: 500 million P: 400 million Does either cigarette maker have a dominant strategy? Why or why not? Use the above matrix to answer, and assume the two companies do not cooperate For purposes of the problem, ignore the existence of other cigarette makers. 2. Does the answer to #1 change if the two firms can cooperate? 3. How would your answer to #1 change if the outcome matrix changed to the following: R. J. Reynolds Increase No change R: 500 million P: 300 million Increase R: 400 million P: 500 million

The two largest cigarette producers are Phillip Morris and R. J. Reynolds. Both are considering whether to increase their price for a pack of cigarettes or keep the price unchanged. The relevant factors to consider are: 1) demand for cigarettes is inelastic, so if both firms raise prices they will increase their revenue, and 2) if one raises price and the other doesn't, they will lose market share to their rival R. J. Reynolds Increase No change Increase R: 500 million R: 400 million P: 600 million P: 300 million Phillip Morris No change R: 200 million R: 300 million P: 500 million P: 400 million Does either cigarette maker have a dominant strategy? Why or why not? Use the above matrix to answer, and assume the two companies do not cooperate For purposes of the problem, ignore the existence of other cigarette makers. 2. Does the answer to #1 change if the two firms can cooperate? 3. How would your answer to #1 change if the outcome matrix changed to the following: R. J. Reynolds Increase No change R: 500 million P: 300 million Increase R: 400 million P: 500 million

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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