Answer to Question #127569 in Microeconomics for Shirleen

Question

Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy. (7 marks)

HIGHPRICE
Firm A
High-price
A = $500
B = $500
Low-price
A = $650
B = $300

LOW PRICE
Firm B
High-price
A = $300
B = $650
Low-price
A = $400
B = $400


(a) What will be the result when each firm chooses a high-price strategy?
(b) What will be the result when Firm A chooses a low-price strategy while Firm B maintains a high-price strategy?
(c) What will be the result when Firm B chooses a low-price strategy while Firm A maintains a high-price strategy?
(d) What will be the result when each firm chooses a low-price strategy?
(e) What two conclusions can you draw about collusion?

Answer 1

a) Each firm will earn $500 million in profit for a total of $1,000 million ($500 +$500)for the two firms.

b) Firm A will earn $ 650 million and firm B will earn$300 million .In high price Strategy, firm A is earning $ 150 million ($650-$500)more than firm B which will be the result when firm B choose a low price Strategy while firm A maintains $200 million ($500-$300)less in profit.

c) Firm B has an incentive to cut prices because it will earn $650 million and firm A will earn $300 million. In high price Strategy, firm B is earning $150 million ($650-$500)more than firm A which will be the result when firm A choose a low price Strategy while firm B maintains $200 million($500-$300 less in profit.

d) Both firm A and B will earn $400 million each and a total of $800 million ($400+$400)for the two firms.

e) The two firms have a stronger strength when they agree to adopt the high price Strategy that in turn will make them earn a profit of $400 million each with a low power strategy.