Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 15, Problem 5MC
To determine
Nash equilibrium with collusion.
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4. Using a payoff matrix to determine the equilibrium outcome
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.
Flashfry Pricing
High
Low
Warmbreeze Pricing
High
Low
11, 11
2,13
13, 2
10, 10
For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $13 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.
price, and if Flashfry prices low, Warmbreeze will make more profit if it
If Flashfry prices high, Warmbreeze will make more profit if it chooses a
chooses a price.
If Warmbreeze prices high, Flashfry will make more profit if it chooses a
chooses a
price.
Considering all of the…
There are two competing firms, Jack and Jill represents a normal form of a game of two firms that produce a widget that is identical in quality. The rows in the table below correspond to the two different strategies available to firm Jack: price High or Low. The columns correspond to the same strategies for Jill: price High or price Low. The numbers in the tables show the profits. The number on the left (first number) is Jack firm profit, and the numbers on the right (second number) is Jill’s firm profit in millions of dollars. For example, If both price High (the upper left cell), then they each get 10 million in profits.
If a firm prices high, the other firm prices low, consumers will have a choice to go to the low firm and the firm that prices high will get zero while the firm that prices low will get all market share.
The game is played simultaneously, meaning same time and neither will know what the decision is.…
a.
b.
Each firm has four alternative strategies, and a certain profit/payoff is associated with
each strategy. The numbers in the payoff matrix denote firm A's profit (in thousands of
dollars). The total amount of profit that can be earned by the two firms together is
$20000. (This is called a "constant sum game.") Firm B's profit is therefore $20000
minus firm A's profit. What strategies will the two firms select? Is the game strictly
determined? If so, how much does each firm gain?
B's strategies
A's strategies ↓
Increase
Advertising
Decrease
Price
Increase
Price
Alter
Product
Increase
Advertising
0
11
8
11
Decrease
Price
8
10
6
2
Increase
Price
7
12
15
Alter
Product
4
15
3
12
Suppose now that due to a change in consumer preferences, firm A's "Increase Price"
strategy pays off better than before when firm B elects to "Decrease Price," that is, the
payoff rises from 6 to 14. What strategies will the two firms now select? Is the game
strictly determined? If so, how much does each firm…
Chapter 15 Solutions
Managerial Economics: A Problem Solving Approach
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Similar questions
- 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…arrow_forwardQUESTION 15 Consider the following information for a simultaneous move game: Two discount stores (megastore and superstore) are interested in expanding their market share through advertising. The table below depicts the strategic outcomes (profits) of both stores with and without advertising. Megastore Superstore Advertise Advertise $95, $80 Don't Advertise $65, $285 b. Megastore $95 and Superstore $80 c. Megastore $65 and Superstore $285 d. Megastore $165 and Superstore $115 Don't Advertise $305, $55 $165, $115 If the stores could co-operate, what is the new Nash equilibrium? a Megastore $305 and Superstore $55arrow_forwardImagine that there are two snowboard manufacturers (FatSki and WideBoard) in the market. Each firm can either produce ten or twenty snowboards per day. The table below (see attached) shows the profit per snowboard for each firm that will result given the joint production decisions of these two firms. Draw the game payoff matrix for this situation. Does either player have a dominant strategy? If so, what is it? What is the Nash equilibrium solution and how many boards should each player produce each day? Since FatSki and WideBoard must play this game repeatedly (i.e. make production decisions every day), what strategy would you advise them to play in order to maximize their payoff over the long term?arrow_forward
- 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. Flashfry Pricing High Low 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. Warmbreeze Pricing High Low 9,9 2,15 15, 2 8,8 If Flashfry prices high, Warmbreeze will make more profit if it chooses a chooses a price. If Warmbreeze prices high, Flashfry will make more profit if it chooses a chooses a price. Considering all of the information given, pricing low True O False price, and if Flashfry prices low, Warmbreeze will make more profit if it price, and if Warmbreeze…arrow_forwardWe consider the following three-player strategic form game, where Alice's strategies are U, C, and D, and Bob's strategies are L, M, and R, and Carol's strategies are A and B. Carol's strategy consists of choosing which table will be used for the payoffs, Table A or Table B.Table A is below, where for each cell the first number is Alice's payoff, the second number is Bob's payoff and the third number is Carol's payoff.. L M R U 8,11,14 3,13,9 0,5,8 C 9,9,8 8,7,7 6,5,7 D 0,8,12 4,9,2 0,4,8 Table A Table B is below, where again, for each cell, the first number is Alice's payoff, the second number is Bob's payoff and the third number is Carol's payoff.. L M R U 14,1,0 13,2,11 1,3,2 C 0,0,2 7,2,3 14,3,2 D 7,12,11 12,12,0 2,11,2 Table B This game may not have any Nash equilibrium in pure strategies, or it may have one or more equilibria.How many Nash equilibria does this game have?arrow_forwardConsider the two-stage, static game depicted in Figure 5.1 involving two companies that enter into an agreement to maximize total profits. The payoffs in this game are in millions of dollars. The optimal strategy for both firms is to: Firm Y A C (3, 3) (1, 1) (1, 1) Firm X (1, 1) (5, 5) (7, 4) C (1, 1) (4, 7) (6, 6) Payoffs: (Firm X, Firm Y) FIGURE 5.1 O Play B in stage 1 and stage 2. O Play B in stage 1 and play A in stage 2. O Play C in stage 1 and stage 2. O Play B in stage 1 and play C in stage 2. O Play C in stage 1 and play B in stage 2.arrow_forward
- Two firms are competing on price. If they have the same price, they share the market otherwise the one with the lowest price captures all demand Market demand follows Q(P)=100-3P Cost is C(Q)=10Q Firms can only choose between the following prices: 9, 10, 11, 12. In the Nash equilibrium of this game, what prices are charged? Suggestion: calculate the profits they obtain for each of the price combinations, write down the game in its normal form (payoff matrix), and then use the underlining method to match best responses. U ப U 9 12 10 110 11arrow_forwardThe following table shows two firms in a single-stage duopoly game. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. This game would be considered a prisoner's dilemma if X is between Tempurpedic Produce 3,000 mattresses $25,000 Produce 4,000 mattresses $35,000 Produce 3,000 $25,000 $10,000 mattresses Sealy $10,000 $35,000 Produce 4,000 mattresses $10,000 and $25,000. d. $35,000 and $70,000. a. b. $25,000 and $35,000. $10,000 and $35,000. е. $45,000 and $70,000. c.arrow_forwardRevlon and L’Oreal cosmetics companies must choose between a high price and a low price for their makeup. Revlon’s annual profit (in millions of dollars) is listed in the payoff matrix below along with L’Oreal’s profits for each combination of strategies. What will be the outcome of this game? Does each player have a dominant strategy?arrow_forward
- The following market is a duopoly populated only by the companies Alpha and Beta. The pay-off matrix immediately below shows the combinations of pricing strategies available to the two companies. The numbers represent millions of dollars in profit. (The negative sign indicates a loss.) Assuming Beta has a first mover advantage, in a one-shot game, what is liekly to be the Nash equilibrium? Explain your answer. Alpha High price Low price High price 250, 200 200, 100 Beta Low price 50, 150 100, 250arrow_forwardIf Bean Bruuer advertises, Hatte Latte makes a higher profit if it chooses If Bean Bruuer doesn't advertise, Hatte Latte makes a higher profit if it chooses Suppose that both firms start off by deciding not to advertise. If the firms act independently, what strategies will they end up choosing? Hatte Latte will choose not to advertise and Bean Bruuer will choose to advertise. Both firms will choose not to advertise. Both firms choose to advertise. Hatte Latte will choose to advertise and Bean Bruuer will choose not to advertise. Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Hatte Latte will choose to advertise and Bean Bruuer will choose not to advertise. Hatte Latte will choose not to advertise and Bean Bruuer will choose to advertise. Both firms will choose to advertise. Both firms will choose not to advertise.arrow_forwardThe following payoff matrix represents a simultaneous-move game between two players: John and Trevor. Each player has to choices: Black or White. The first number in each cell is the payoff to John, and the second number is the payoff to Trevor. Trevor Black White Black 15, 15 10, 10 John White 12, 10 13, 15 Refer to the table above. Which statement is true? a. Neither John nor Trevor have a dominant strategy in this game. b. Only Trevor has a dominant strategy in this game. c. Only John has a dominant strategy in this game. d. John and Trevor both have a dominant strategy in this game.arrow_forward
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