Deadline Today at 0919 PM Say that two firms supply the entire quantity of a goo

Question

Deadline Today at 0919 PM Say that two firms supply the entire quantity of a good in a market, and that barriers exist which prevent other firms from entering the market. The two firms agree to limit the quantity they produce to raise the market price. The situation is as described in the igure at the link below. http://drive.google.com/fle/d/itTTM6d72UGY4IZLDLuvRm3jaRR2voI2qview usp-sharing 4.4· The Pareto optimal outcome is: O A. Both firms cooperate B. Firm 1 cooperates, Firm 2 defects C. Firm 2 cooperates, Firm 1 defects D. Both firms defect O Continue without saving

Explanation / Answer

In this particular question Nash equilibrium exist when both the firms are defecting. It can be seen that the payoffs in defect are lower than the playoffs that the players will achieve if they co-operate. Corporate for both of the players is a strategy that gives them the maximum benefit in the nature of Pareto optimality. However the other two strategies when one defect and the other cooperate, there is a higher profit of 4. But this reduces the profit for the other which is not a Pareto optimal allocation. Correct choice is A.

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