Black and White are the two and only producers of piano keys. The firms are iden

Question

Black and White are the two and only producers of piano keys. The firms are identical. Despite it being illegal, the two firms decide to collude: to restrict output and raise the price. With the deal in place, the firms can earn the maximum monopoly profit and share it equally. Black's strategies Break agreement Keep agreement But each firm wants a bigger share of the market. They play a prisoners' dilemma game. The table shows the payoff matrix for the game they are playing $0 Find the equilibrium of the game The Nash equilibrium is that Black Break agreement and white O A. breaks agreement, breaks agreement O B. breaks agreement; keeps agreement ° C. keeps agreement; keeps agreement $0 $14m White's strategies $14m $10m D. keeps agreement, breaks agreement Keep agreement $10m

Explanation / Answer

Answer

Option A

The dominant strategy is played by a player instead of any strategy by the opponent.

because

if Black pays breaks agreement then the white choose to the breaks agreement because white will get the higher payoff

0>-5

if black pays keep agreement then the white plays break the agreement because he will get the higher payoff

14>10

in the same way, react black to strategies of black because the payoff is same so both have break agreement is the dominant strategy.

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