The payoff matrix below shows the payoffs for two coffee manufacturers, Cambridg

Question

The payoff matrix below shows the payoffs for two coffee manufacturers, Cambridge and Greystone, which are deciding whether to advertise. The blue payoffs show Cambridge's profit for different strategies selected by each firm. The orange payoffs show Greystone's profit. For example, if Cambridge advertises and Greystone does not advertise, Cambridge's payoff is 10,000 euros and Greystone's payoff is 3,000 euros. Consider this a one-shot game; that is, they interact only once and never again.

Greystone

Advertise Not advertise

Cambridge Advertise 5,000 , 5,000 10,000 , 3,000

Not advertise 3,000 , 10,000 7,000 , 7,000



1.1. Suppose that it is legal to write a binding contract on what each coffee manufacturer will do. What is the cooperative solution to this game that the firms would outline in their contract?

A. Cambridge does not advertise, and Greystone does not advertise.

B. Cambridge advertises, but Greystone does not advertise.

C. Cambridge does not advertise, but Greystone advertises.

D. Cambridge advertises, and Greystone advertises.
1.2 Does Greystone have a dominant strategy?
A. Yes, Greystones dominant strategy is NOT to advertise
B. Yes Greystones dominant strategy is to advertise
C. NO
1.3 Does Cambridge have a dominant strategy?
A. Yes, Cambridge has a dominant strategy not to advertise
B. Yes Cambridge has a dominant strategy to advertise
C. NO
1.4. What is the Nash equilibrium in this game?

A. Cambridge does not advertise, and Greystone does not advertise.

B. Cambridge advertises, and Greystone advertises.

C. Cambridge advertises, but Greystone does not advertise.

D. Cambridge does not advertise, but Greystone advertises.

Explanation / Answer

I can't figure out the payoff table, but if this is your typical prisoners' dilemna cooperate, not cooperate game, the cooperative solution is for them to both advertise. However, the dominant strategy for both is to not advertise, so the Nash equilibrium is for neither of them to advertise. In other words 1.1 D 1.2 A 1.3 A 1.4 A

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