NAME PRINT LAST NAME, FIRST NAME Use the payoff matrix below to answer questions
ID: 1120513 • Letter: N
Question
NAME PRINT LAST NAME, FIRST NAME Use the payoff matrix below to answer questions 7 and 8 about two major airlines, Rightway and Leftway, and their pricing decision. Rightway sets a low price Rightway sets a high Leftway Rightway's profit is $10 Rightway's profit is S5 sets a low million and Leftway's million and Leftway's priceprofit is $10 million Leftway Rightway's profit is $20 Rightway's profit is $15 sets a high million and Leftway's million and Leftway's price profit is $5 millionprofit is $15 million profit is $20 million 7. Suppose that Rightway must decide whether to charge a low price or a high price without knowing what Leftway will do. In the Nash equilibrium, Rightway will set aprice based on the analysis of the payoff matrix, which indicates that Leftway will set a price a. high; high b. low; low c. low; high d. high; low 8. Which strategy maximizes Rightway's and Leftway's combined profit? a. b. c. d. Both airlines set a low price Both airlines set a high price Rightway sets a low price and Leftway sets a high price Rightway sets a high price and Leftway sets a low price 9. An arrangement where there is explicit collusion between competitors to set a common price and adhere to output quotas is referred to as: a. a contestable market. b. a perfect competitor. c. a cartel. d. a monopoly 10. Industry profit is likely to be lowest in an industry that: a. has a clear price leader who is followed by all of the other firms. b. adheres to a cartel agreement. c. is a contestable market. d. has significant barriers to entry Chapter 14 Assignments 304Explanation / Answer
7. b) low; low
Rightway will set low price because irrespective of the decision of leftway, it earns higher payoff i.e. either $ 10 or $ 20 million which is greater than $ 5 or $ 15 million. Similarly for leftway.
8. b) both airlines set a high price.
Combined profit is maximum when both set high price. Total profit in this case will be ($ 20 + $ 20)million = $ 40 million which is greater than the combined payoff of all other combinations.
9. c) a cartel
10. c) is a contestable market.
Market where there is no barriers in the entry and exit of firms, firms earns least profit.
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