9. Problems and Applications Q9 Little Kona is a small coffee company that is co
ID: 1118119 • Letter: 9
Question
9. Problems and Applications Q9 Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price: Big Brew High Price Low Price Enter $2 million, $3 million-$2 million, $1 million Little Kona Don't Enter 0, s8 million O, $3 million True or False: Both Little Kona and Big Brew have a dominant strategy in this game True TIN: False Which of the following outcomes represent a Nash equilibrium in this case? Check all that apply 0 Big Brew maintains a high price and Little Kona does not enter Big Brew maintains a low price and Little Kona enters. Big Brew maintains a low price and Little Kona does not enter, Big Brew maintains a high price and Little Kona entersExplanation / Answer
Statement is false. (Little Kona does not have a dominant strategy)
Big Brew has a dominant strategy of setting a high price. (No matter what Little Kona chooses, Big Brew would get a higher payoff when it sets a higher price)
Nash equillibrium:
- Big Brew maintains a high price and Little Kona enters.
Little Kona should not believe the threat as it is not credible (False, Big Brew has a dominant strategy of setting a high price)
Collusion:
- Big Brew maintains a high price and Little Kona does not enter (Total profits = $8 mn, each one would be better off when profits are divided equally)
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