Question

Exhibit 10-6 Two-Firm Payoff Matrix Ajax Company High price Low price $00 bilion $20 bilion $60 bilion $10 bilion $10 bilion $20 bilion $20 bilion $20 bilon Suppose costs are identical for the two firms in Exhibit 10- 6. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by: Widget Co. charging the high price and Ajax Co. charging the low price. Widget Co. charging the high price and Ajax Co. charging the high price. Widget Co. charging the low price and Ajax Co.charging the low price Widget Co. charging the low price and Ajax Co. charging the high price. Widget Company price price

Answer 1

"B"

Both the firm in the market charging a high price is a Nash equilibrium from which none of the firms will deviate unilaterally unless they want to face loss. So both the firm will stick to the high price agreement.