Yellow Submarine and Garden State Subs are the only two sandwich restaurants in a small town....

    

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Yellow Submarine and Garden State Subs are the only two sandwich restaurants in a small town. Each firm can choose to set a high price or a low price for a sandwich meal. The payoff matrix below shows the daily profits for any combination of strategies the two restaurants can choose. The payoff for Yellow Submarine is listed first; the payoff for King Steak is listed second. Assume both restaurants have complete information. Garden State Subs High Price Low Price Yellow Submarine High Price $10, $13 $6, $14 Low Price $12, $8 $9, $7 a. If Yellow Submarine selected a high price, what strategy will Garden State Subs select? Explain using the dollar values in the payoff matrix. b. Assume Yellow Submarine and Garden State Subs collude, both agreeing to choose high prices in order to maximize their joint profit at $23. If such an agreement is not legally enforceable, does Yellow Submarine have an incentive to break the agreement? Explain using specific values. c. Instead of colluding, the firms simultaneously select their prices. In the Nash Equilibrium, what are the daily profits for each of the following: i. Yellow Submarine: ii. Garden State Subs: d. Now suppose the government offers both restaurants a $2 subsidy if they lower their prices. Redraw the payoff matrix to show the results of the subside: Yellow Submarine and Garden State Subs are the only two sandwich restaurants in a small town. Each firm can choose to set a high price or a low price for a sandwich meal. The payoff matrix below shows the daily profits for any combination of strategies the two restaurants can choose. The payoff for Yellow Submarine is listed first; the payoff for King Steak is listed second. Assume both restaurants have complete information. Garden State Subs High Price Low Price Yellow Submarine High Price $10, $13 $6, $14 Low Price $12, $8 $9, $7 a. If Yellow Submarine selected a high price, what strategy will Garden State Subs select? Explain using the dollar values in the payoff matrix. b. Assume Yellow Submarine and Garden State Subs collude, both agreeing to choose high prices in order to maximize their joint profit at $23. If such an agreement is not legally enforceable, does Yellow Submarine have an incentive to break the agreement? Explain using specific values. c. Instead of colluding, the firms simultaneously select their prices. In the Nash Equilibrium, what are the daily profits for each of the following: i. Yellow Submarine: ii. Garden State Subs: d. Now suppose the government offers both restaurants a $2 subsidy if they lower their prices. Redraw the payoff matrix to show the results of the subside: