3. Cartel Consider a remote town in which two restaurants, All-You-Can-Eat Cafe

Question

3. Cartel Consider a remote town in which two restaurants, All-You-Can-Eat Cafe and GoodGrub Diner, are the only restaurants in town. Both restaurants realize that if they form a cartel to act as a monopoly, they will serve fewer customers, increase pnces, and end up increasing their profits. If both restaurants choose to cooperate by serving fewer customers, each will earn $8,000; alternatively, if they both cheat by serving more customers than their cartel agreement allows, each will earn only $5,000. However, if one cheats and the other doesn't, the one that cheats will earn $12,000, and the other restaurant will earn only $3,000. Based on the preceding information, use the dropdown menus to fill in the following payoff matrix. All-You-Can-Eat Cafe Cooperate Cheat Cooperate GoodGrub Diner What is the dominant strategy for both restaurants? Cooperate Cheat The equilibrium outcome of this game is Cheat

Explanation / Answer

Payoff matrix:

Dominant strategy for both : Cheat

Equilibrium outcome: Both will cheat. So (5000,5000)

Cooperate Cheat Cooperate 8000,8000 3000,12000 Cheat 12000,3000 5000,5000

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