The payoff matrix below presents the profits for Firms X and Y under their two i

Question

The payoff matrix below presents the profits for Firms X and Y under their two individual pricing strategies. Suppose both firms have agreed to maximize their combined profits by colluding on their pricing strategies. Use the information in this payoff matrix to answer the following two questions Firm X Strategy 1. Compare the profits of Firm X when both firms respect the collusive agreement to the profits of Firm X when Firm X secretlyy cheats on the agreement. How much additional profit would Firm X earn by secretly cheating on the agreement to collude? (Round your answer to the nearest whole number.) Firm Y StrategyLow Price High Price Firm X Profit = 75 Firm Y Profit = 75 Firm X Profit = 113 Firm Y Profit = 45 Firm X Profit = 45 Firm Y Profit = 113 Firm X Profit = 87 Firm Y Profit = 87 Low Price High Price Number 2. Compare the profits of Firm Y when both firms respect the collusive agreement to the profits of Firm Y when both firms cheat on the agreement. By how much would the profit of Firm Y fall if both firms cheat on the agreement to collude? (Round your answer to the nearest whole number.) Number

Explanation / Answer

1. If both firms collude then both agrees to charge high price for commodity because it gives both firms higher profit i.e. $ 87 each. When firm X cheats that means X charges low price. Now, profit of X = 113 while profit of Y = 45.

Additional profit which firm X earns = 113 - 87 = $ 26

2. If both firms collude then both agrees to charge high price for commodity because it gives both firms higher profit i.e. $ 87 each. When both firms cheat that means both firms charge low price. Now payoff of both firm is $ 75.

Fall in profit of Firm Y = 87 - 75 = $ 12

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