Assume market demand can be written as P = 200 - Q and there are two...

 

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Assume market demand can be written as P = 200 - Q and there are two identical firms (A and B) in the industry with the same cost structure MC = AC = 0. (a) Suppose these two firms can choose to cooperate like a cartel or not to cooperate through cheating on the cartel output by producing 20 extra units of output. Determine each of the four possible outcomes in terms of price, output and profit for each firm. Use the results from part (a) to construct a payoff matrix. Demonstrate each firm has a dominant strategy that leads to the Nash equilibrium. Does Nash equilibrium lead to Prisoners' Dilemma outcome? Why? Is this equilibrium good or bad for firms and consumers? Why? Would results change if this game is repeated? Does it matter if these firms know how many times (T) this game will be played? (b) (c) Assume market demand can be written as P = 200 - Q and there are two identical firms (A and B) in the industry with the same cost structure MC = AC = 0. (a) Suppose these two firms can choose to cooperate like a cartel or not to cooperate through cheating on the cartel output by producing 20 extra units of output. Determine each of the four possible outcomes in terms of price, output and profit for each firm. Use the results from part (a) to construct a payoff matrix. Demonstrate each firm has a dominant strategy that leads to the Nash equilibrium. Does Nash equilibrium lead to Prisoners' Dilemma outcome? Why? Is this equilibrium good or bad for firms and consumers? Why? Would results change if this game is repeated? Does it matter if these firms know how many times (T) this game will be played? (b) (c)

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B Payoff matrix AB Cooperate cheat Cooperate 50005000 40005600 Cheat 56004000 42004200 NE cheat chea... View the full answer