9 Two firms producing the same product agree to collude by r

9. Two firms producing the same product agree to collude by restricting their total production to drive up the market price for their product and make profits of $18 million each. But if one of the firms restricts output (thereby keeping the agreement) while the other cheats and produces more, the latter makes $20 million while the former makes only $13 million. If they both cheat on their agreement, they end up making $15 million in profits each. The payoff matrix of this game is shown below (payoffs are displayed in millions of dollars): Firm 2 Collude Cheat Collude Cheat 18,18 20,13 13,20 15, 15 Firm 1 In this game, a dominant strategy equilibrium is: A. (collude, Cheat) O B. (Cheat, Cheat) C. (cheat, collude) D. (collude, Collude) Subnit Answer Continue without saving

Solution

9) (Cheat,Cheat) is a dominant strategy nash equilibrium because dominant strategy is a strategy which a player plays irrespective of what other player plays. Thus both player plays cheats irrespective of what other player plays.Thus (Cheat,Cheat) is a nash equilibrium.

10)(Talk,Talk) is a nash equilibrium. Nash equilibrium is a situtaion where no player have any incentive to deviate given other players strategy.