SECTION\" NAME Use the payoff matrix below to answer questions 7 and 8 about two
ID: 1119345 • Letter: S
Question
SECTION" NAME Use the payoff matrix below to answer questions 7 and 8 about two major airlines, Rightway and Leftway, and their pricing decision. PRINT LAST NAME. FIRST NAME Rightway sets a low price Rightway sets a high price Leftway Rightway's profit is $10 Rightway's profit is SS sets a low million and Leftway's million and Leftway's price-1Profitis $10million profitiS$20 million Leftway Rightway's profit is $20 Rightway's profit is $15 sets a high million and Leftway's million and Leftway's price profit is $5 million profit is $15 million 7. Suppose that Rightway must decide whether to charge a low price or a high price with knowing what Leftway will do. In the Nash equilibrium, Rightway will set a based on the analysis of the payoff matrix, which indicates that Leftway will set a price. a. high; high b. low; low e. low; high d. high; low price 8. Which strategy maximizes Rightway's and Leftway's combined profit? a. b. c. Rightway sets a low price and Leftway sets a high price Both airlines set a low price Both airlines set a high price d. Rightway sets a high price and Leftway sets a low price 9. An arrangement where there is explicit collusion between competitors to set a common price and adhere to output quotas is referred to as: a. a contestable market. b. c. a perfect competitor. a cartel. d. a monopoly. 10. Industry profit is likely to be lowest in an industry that a. has a clear price leader who is followed by all of the other firms. b. adheres to a cartel agreement. c is a contestable market. has significant barriers to entry.Explanation / Answer
7. In this case, as Rightway doesn't know which strategy leftway is going to choose Therefore in nash equilibrium it must choose it's strategy which is the dominant strategy.
Let's find out Rightway' s dominant strategy.
When leftway choose low prices, Rightway is better off by choosing low prices as well. Because, it will get a profit of $10 instead of $5 when choosing 'high' price.
When leftway choose high price, Rightway will be better off by setting low prices again.
So, no Matter what Leftway choose, Rightway is always better off by setting low prices. Therefore, setting low prices is Rightway's dominant strategy and in nash equilibrium Rightway will choose this strategy.
Now from the payoff matrix we'll find out Leftway's dominant strategy.
When Rightway sets low prices, leftway gets higher profit by choosing low prices as well. And when Rightway sets high prices, leftway again will be better off by setting low prices.
So, setting low prices is leftway's dominant strategy as no matter what Rightway choose, leftway is always better off by setting low prices. Leftway will pick this strategy In nash equilibrium.
Answer- (Option B)
8. When both leftway and Rightway sets High prices, then the combined profit will be maximum, i.e. ($15 million + $15 million)= $30 million is the combined maximum profit.
Answer- option (b)
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