6. Using a payoff matrix to determine the equillbrium outcome Suppose there are

ID: 1118692 • Letter: 6

Question

6. Using a payoff matrix to determine the equillbrium outcome Suppose there are only two firms that sell smartphones, Flashfone and Pictech. The payoff matrix that follows shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones. For example, the lower-left cell shows that If Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $10 million and Pictech will earn a profit of $3 million Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms. Pictech High Price Low Price High Price8, 3, 10 Flashfone Low Price 10, 3 5, 5 If Flashfone prices high, Pictech will make more profit if it chooses a Pictech will make more profit if it chooses a price, and if Flashfone prices low price. If Pictech prices high, Flashfone will make more profit if it chooses a Flashfone will make more profit if it chooses ap price, and if Pictech prices low, -price. Considering all of the information given, pricing low a dominant strategy for both Flashfone and Pictech. If the firms do not collude, what strategies will they end up choosing? O Flashfone will choose a high price and Pictech will choose a low price. O Both Flashfone and Pictech will choose a low price O Both Flashfone and Pictech will choose a high price. O Flashfone will choose a low price and Pictech will choose a high price. True or False: The game between Flashfone and Pictech is not an example of the Prisoners' Dilemma. O True O False

Explanation / Answer

1) If Flashfone prices high, Pitch will make more profit if it chooses a Low price because it will give him a payoff of $ 10 which is greater than $ 8.

2) Low price because the payoff of $ 5 is greater than the payoff of $ 3.

3) If Pictech prices high, Flashfone will make more profit if it chooses a Low price because it will give him payoff of 10 which is greater than 8.

4) Low price because the payoff of $ 5 is greater than the payoff of $ 3.

5) Pricing low is the dominant strategy for both.

6) Both Flashfone and Pictech will choose a low price.

7) False. Prisonner’s dilemma is there.