Use the following to answer questions (1) - (7): Two firms (A and B) are attempting to set up a price fixing scheme. Each firm must choose between maintaining the agreed upon price (i.e., Maintain P), or cutting price (i.e., Cut P). The payoff matrix is indicated below:

B

Maintain P Cut P

A. Maintain P. 15,15. 0,20

Cut P. 20, 0 6,6

Note: As payoffs (in millions of dollars) are listed 1st, while Bs payoffs (in millions of dollars) are listed 2nd.

[1] If this game is played once, then the Nash equilibrium is for A to ___ and B to ___. A. Maintain P; Maintain P B. Maintain P; Cut P C. Cut P; Maintain P D. Cut P; Cut P [2] Suppose the game is played two times, with both A and B adopting a tit-for-tat strategy. Further, suppose each player has a discount factor () equal to 0.80. The corresponding interest rate (r) equals: A. 0.80 B. 0.50 C. 0.25 D. None of the above [3] Suppose the game is played two times, with both A and B adopting a tit-for-tat strategy. Further, suppose each player has a discount factor () equal to 0.80. Accordingly, we expect both players to select ___ in the first play of the game and both players to select ___ in the second play of the game. A. Maintain P; Maintain P B. Maintain P; Cut P C. Cut P; Maintain P D. Cut P; Cut P [4] Continuing question (3), at the equilibrium each firm will have a present value of its profit stream across the two plays of the game equal to: A. 27 B. 19.8 C. 10.8 D. 9.33

[5] Suppose the game is repeatedly played an infinite number of times, with both A and B adopting a trigger strategy. If As discount factor () = 0.80, coupled with it choosing to cheat in each play of the game, then the present value of As profit stream across all plays of the game equals: A. 75 B. 44 C. 30 D. 25 [6] Suppose the game is repeatedly played an infinite number of times, with both A and B adopting a trigger strategy. If As discount factor () = 0.50, then it is best for A to cooperate forever. A. True B. False [7] Suppose this game is repeatedly played an infinite number of times, with both A and B adopting a trigger strategy. Of the options below, what must As discount factor () be closest to such that it is indifferent between cooperating forever and cheating forever? A. 0.80 B. 0.50 C. 0.35 D. 0.20