The matrix to the right shows payoffs (profits in millions) based on the strateg

Question

The matrix to the right shows payoffs (profits in millions) based on the strategies chosen by two firms. If they collude and hold prices at $1.25, agreement, lowering its price, but firm B does not, then firm A will get 75 S8 million. Similarly, if firm B cheats and firm A does not, then firm B will then each firm will earn profits of $20 million. If firm A cheats on the percent of the business and earn profits of $32 milion and firm B wil lose earn $32 milion and firm A will lose S8 million. If both firms cut prices, B's Strategy then they wil end up with $8 million each in profits. firm B? The maximin strategy for both firms is to cheat Agree Cheat Which strategy minimizes the maximum potential loss for firm A and for $20 $32 Agree A's Strateg If you were firm A which strategy would y Firm A shouid cheat S-8 $8 Cheat stand by the agreement sa ? A. cheat because this is their dominant strategy D B. stand by the agreement because this is their maximin strategy C. cheat because this maximizes profts of both firms ) D. stand by he agreement because this is their dominant strateay E stand by the agreement because this is theirhut-for-tat strateay If firm A cheats, then firm B wil cheats. then frm A wi w , and if firm B What is the most ikely outcome of such a game? Explain? DIA Firm A will cheat and firm B will stand by the agreement because O B. Firm A and firm B will both cheat because doing so is each firm's Click to select your answer these are their dominant strategies

Explanation / Answer

The maximin startegy is the strategy which maximize the minimum payoff of the player.

So here the Maximin strategy for both firms is to Cheat as by choose to cheat firm A and B could either make $32 or make $8, while by agree they both will either make $20 or loss $8 so the minimum payoff when chooses to agree is loss of $8, while the minimum payoff when choose cheat is $8.

- So they maximin strategy for bith firms is to Cheat.

Firm A should

correct ans is A) Cheat because that is their dominant strategy.

Explaination : Dominant strategy is teh strategy which the player will choose to play irrespective of what other plays plays. It means if firm A chooses to cheat as its best strategy irrespective of what firm B chooses it means it is firm's A dominant strategy. To find dominant strategy of firm A;

If Firm B chooses to Cheat - The best strategy for firm A is to cheat because if it choose to agree, it will lead to a loss of $8 while by cheat, it could earn a payoff of $8. So best strategy for firm A is to cheat when Firm B cheats.

If Firm B chooses to agree - the best strategy for Firm B is to cheat because if it chooses to agree, it wil receive a payoff of $20, while by cheat, it will receive a payoff of $32 and $32 > $20 so firm A will cheat when firm B Agree.

Here whatever firm B chooses, the best startegy for firm A is to cheat so dominant strategy is to cheat.

So correct option is A.

- IF firm A Cheats, Firm B will Cheat, and if firm B Cheats, then firm A will Cheat.

Explaination :

Firm A will always choose to cheat (As its dominant strategy is to cheat) and firm B will also always cheat ( because it isits dominant startegy also).

Firm B dominant strategy:

If Firm A chooses to Cheat - The best strategy for firm B is to cheat because if it choose to agree, it will lead to a loss of $8 while by cheat, it could earn a payoff of $8. So best strategy for firm B is to cheat when Firm A cheats.

If Firm A chooses to agree - the best strategy for Firm A is to cheat because if it chooses to agree, it wil receive a payoff of $20, while by cheat, it will receive a payoff of $32 and $32 > $20 so firm B will cheat when firm A Agree.

Here whatever firm A chooses, the best startegy for firm B is to cheat so dominant strategy is to cheat.

The most likely outocme is ...

correct ans is B) Firm A and firm B will both cheat because doing so is each firm's dominant strategy.

explained above.

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