Questions 123678 Figure 174 Two companies Acme and Bilco are

Figure 17-4. Two companies, Acme and Bilco, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. Acme\'s Decision High price Low price Acme\'s profit $5 million Acme\'s profit = $7 million High price Bilco\'s profit $5 million Bilco\'s profit $2 million Bilco\'s Decision Acme\'s profit-S2 million Acme\'s profit $3.25 million Low price Bilco\'s profit = $7 million Bilco\'s profit- $3.25 million

Solution

ANS:

the dominant strategy for BILCO is low price because no what ACME choose it\'s payoff will always he high if it plays a low price strategy as (7>5, 3.25>2) , similarly for ACME also the dominant strategy is LOW price ( as 7>5 , 3.25>2)

ans 1. option d

option1 ruled out as dominant strategy is low price for both

option 2 ruled out as if aim was to max the sum of profits then 5+5 > 7+2

option 3 ruled out as if ACME were to cheat then why will it cheat to get low profits

hence, correct option is option no. 4

ans 2. option d

all the 3 options are wrong as ACME will charge a low price no matter whether BILCO charges a high price or low price as when bilco charges high price acme profits are higher if it charges low price(7>5) similarly if bilco charges a low price acme profits are higher if it also charges a low price (3.25>2)

ans 3. option c

BILCO will always charge a low price no matter what ACME chooses as low price is it\'s dominant strategy.

ans 6. option c

5,5 is the result of cooperation only and this cooperation is also dificult to achieve as both have an incentive to deviate from strategy H,H and cheat the other and pocket high profit of 7 as compared to 5 when they cooperate.