Use the figure below to answer the following questions 18-20: Two companies, ABC

Question

Use the figure below to answer the following questions 18-20: Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. ABC's Dedision High output Low output ABC's proSt-$2.5 million ABC's profit $3 million High output XZ's proft- $3 miltion XYZs profitn $4milion YZ D ecizion ABC's profit S4 million ABC's profit $3.5 million Low output XYZ's profit S2.5 million Z's profit S3.5 million 18. The dominant strategy for ABC is to A) produce low output, and the dominant strategy for XYZ is to produce high output. B) produce low output, and the dominant strategy for XYZ is to produce low output. C) produce high output, and the dominant strategy for XYZ is to produce high output. D) produce high output, and the dominant strategy for XYZ is to produce low output. 19. If this game is played only once, then the most likely outcome is that A) both firms produce a low level of output. B) ABC produces a low level of output and XYZ produces a high level of output. C) ABC produces a high level of output and XYZ produces a low level of output. D) both firms produce a high level of output. 20. If this game is played repeatedly and ABC uses a tit-for-tat strategy, it will choose a A) high level of output in the first round and in subsequent rounds it will choose whatever XYZ choose in the previous round. B) low level of output in the first round and in subsequent rounds it will choose whatever XYZ choose in the previous round C) high level of output in all rounds, regardless of the choice made by XYZ. D) high level of output in all rounds, regardless of the choice made by XYZ

Explanation / Answer

18) The dominant strategy for ABC is to produce high output and the dominant strategy for XYZ is to produce high output. Because producing high output gives both players higher payoff . So it is the dominant strategy.

19) Option D is correct. Both firms produce hifh output. This is because both will play their dominnat strategy which is high output.

20) Both option C and D are correct. high level of outputs in all rounds . Regardless of the choice made by XYZ.

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