Answer the question based on the following payoff matrix for a duopoly in which

Question

Answer the question based on the following payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each fem Firm A High Price Low Price ? | A= $250 | As$325 c . B = $250 | B = $200 | ? | A = $200 A = $175 B $325 B $175 Refer to the above payoff matrix. If the two firms collude to e joint profits O There will be an incentive for Firm A to cheat and earn more if Firm 8 does not switch strategies O There will be an incentive for Firm B to cheat and earn more if Firm A does not switch stretegies O There will be incentives for both Firm A and Firm B to cheot O There wilil be ho incentive for elther Firm A or Firm B to cheot

Explanation / Answer

According to the profit matrix, there will be incentive for both Firm A and Firm B to cheat. Hence the correct answer (C). This is because, if they collude to maximise prices, they get $250 as profits. But if any one cheats, the one who is cheating gets a profit of $325. Hence both of them will have a tendency to cheat to increase their profits.

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