Two firms A and B are attempting to sustain a cartel agreement. Each must decide

Question

Two firms A and B are attempting to sustain a cartel agreement. Each must decide between cooperate (e.i stick to the cartel quota level of output) or cheat (ei. Produce beyond the cartel quota level of output) with the payoffs below. A’s payoffs are listed first, b’s second.

                                           A

                               COOP/CHEAT

B       COOP         100,100/ 120,25

        CHEAT        25,120/ 80,80

Suppose the game is played once, accordingly, the Nash equilibrium corresponds to both firms cheating on the agreement. True or false

Suppose the game is played twice. A adopting a tit-for-tat strategy will lead to a Nash equilibrium in which both a and b choose to cooperate in each period.

True or false

Suppose the game is played an infinite number of times, with each firm adopting a trigger strategy. Which per period interest rate (r) below will induce the firms to cooperate forever.

a. 0.90

b. 1.25

c. 1.75

d. none of the above

Explanation / Answer

True

Because if game is played only once, They have no interest in co-opeation so both go ahead and cheat

False

First time they co-opeate second time each individual firms want profit so cheat each other. As there is no third time.

D

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