1. Consider a market with two firms managed by Harry and Vera. Under a cartel (both firms pick the high price), each firm earns a profit of $80. Under a duopoly (both firms pick the low price), each firm earns a profit of $60. If the two firms pick different prices, the high-price firm earns a profit of $20 and the low-price firm earns a profit of $90.

a. Fill in the following payoff matrix.

b. The outcome of the pricing game is that Harry picks the _______price and Vera picks the ______price.

c. The outcome identified in part (b) is a Nash equilibrium because neither firm has an incentive to ______.

2. The prisoners dilemma is that each prisoner would be better off if both prisoners ______, but both end up ______.
3. The cheaters dilemma is that all three cheaters would be better off if each______ , but each cheater has an incentive to______.

Transcribed Image Text:

Vera High price Low price High price Low price