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Unformatted text preview: have gotten together and secretly (because doing this is illegal) set the price of cheeseburgers at $1.50. Their payoffs are as follows. If each charges $1.50, they both make $2 million in profits. If each charges $1.00, they each make $1 million in profits. If one charges $1.50 and the other charges $1.00, the one who charges $1 makes $2.9 million in profits, while the other makes no profits. Burger King $1.00 $1.50 McDonald’s $1.00 $1.50 a. Fill in the above table. b. Suppose the companies are both playing a grim strategy and the game lasts two periods. McDonald’s is considering cheating. If the interest rate is 20%, should McDonald’s cheat in the first period, the second period, or not at all? Explain. c. Suppose the companies are both playing the grim strategy, and the game lasts forever. McDonald’s is considering cheating. How high does the interest have to be for cheating to be a sound strategy for McDonald’s?...
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- Spring '06
- Economics, McDonald, BURGER KING, Hamburger