QCT5 answers

# D the nash equilibrium occurs when each firm charges

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( d ) The Nash equilibrium occurs when each firm charges a low price. 6. We have seen in the answer to Problem 1 c above that each firm adopts its dominant strategy of charging the low price and earns a profit of 1 (see the top left cell of the payoff matrix in Problem 1 c ). Each firm, however, would earn a profit of 2 if each charged a high price (see the bottom right cell). But that could only be achieved through cooperation. Thus, firms A and B face the prisoners' dilemma. 10. ( a ) From the payoff matrix of the problem, we see that firm A adopts its dominant strategy of charging a high price and firm B enters the market. Thus, firm A earns a profit of 4 and firm B earns a profit of 5. ( b ) The threat by firm A to lower price should not discourage firm B from entering the market because the threat is not credible. The reason is that firm A earns a profit of 3 if it charges the low price and a profit of 4 if it charges the high price. ( c ) Short of building excess capacity, firm A can make its threat credible by cultivating a reputation for aggressively fending off entry into the market by lowering price (and thus imposing a loss on the potential entrant), even if this means lower profits.

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Froeb and McCann’s chapter 15: a. Individual problems: 15-4 Airline Hub Game There are two equilibria (this is a game of chicken): Airline A Atlanta Chicago Airline B Atlanta \$40M , \$40M \$85M , \$60M Chicago \$60M , \$85M \$35M , \$35M 15-5 Auditing Game There are no pure strategy equilibrium. There is, however, a mixed strategy equilibrium. Auditor Audit Don’t Audit Manager Prepare 20 , -20 -20 , 20 Don’t Prepare -20 , 20 20 , -20
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