Question

Answer and label the answer, also provide an explanation or your work

Seclusion Bay has two car wash companies, one owned by Cheri and the other owned by Joel. Cheri's strategies (red squares) Suppose that Cheri and Joel have two strategies: to collude, fix the monopoly price, and limit the number of car washes, or to break the colusion, cut the price, and produce more car washes. Colude Don't colude 45.50 72.80 The table gives the payoff matrix of economcprot (n dollars) for the game that Cheri and Joel play. Jocls strategies Colude 45.50 22.75 (blue squares) -22.75 Don't collude 72.80 If this game is played just once, the Nash equilibrium is that 0 A, both Cheri and Joel collude O B. Cheri and Joel either collude or break the collusion but we dont know for sure O C. Cheri breaks the collusion and Joel colludes O D. Cheri colludes and Joel breaks the collusion OE. both Cheri and Joel break the collusion The people of Seclusion Bay the same quantity as would be produced OA. receive; in perfect competition O B. do not receive; by a monopoly the efficient quantity of car washes from Cheri and Joel because they produce

Answer 1

If Cheri colludes then, in that case, Joel will get the pay-off of 45.50 if he also colludes and a pay-off of 72.80 if he does not collude.

Since, pay-off for Joel is greater when he does not collude, he will not collude even if the Cheri colludes.

If Cheri does not collude then, in that case, Joel will get a pay-off of -22.75 if he colludes and a pay-off of 0 if he does not collude.

Since, the pay-off for Joel is greater when he does not collude, he will not collude if Cheri also do not collude.

Thus, Joel will always break the collusion as it increases his profit.

Similarly, Cheri will also utilize the same strategy and will always break the collusion.

So,

If the game is played just once, the Nash equilibrium is that both Cheri and Joel break the collusion.

Hence, the correct answer is the option (E).

Since, both Joel and Cheri will break the collusion, they both will operate as perfectly competitive firms instead of monopoly.

The people of Seclusion Bay receive the efficient quantity of car washes from Cheri and Joel because they produce the same quantity as would be produced in perfect competition.

Hence, the correct answer is the option (A).