Question

Be sure to show all of your math step-by-step.

Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make.

Alcoa

   High Price Low Price

High price	Low price
Kaiser	High price	A $400,  $500	B $175,  $575
	Low price	C $525,  $200	D $273,  $250

What is the monthly gain to Kaiser from cheating? What is the present value of the benefit from cheating for the two months of cheating?

What is the monthly cost of punishment to Kaiser? What is the pres­ent value of the cost of cheating for the two months of punishment?

Will Kaiser cooperate or cheat? Explain.

Answer 1

Ko High Peni cowbun negebrin 400, 500 sas, 200 Low Puri 1 6, 57 273, 250 (low puii, cow pui) is a PSNE (ligthenie, nigh pui) can be a collessive ankome. Zef Kaia cheat then it can gain $525 instead of yoo This monthly gain of #125 per month. Two months cheating fra 125 + 125 8 ③ y monthly cost of punishment = 525-273 = 252 P. V. of cost of cheating = 252 +252 Payoff from collusion - 400+4008 - You " "chenly = 525 +2238 Toy 525 +2335 - 400-2732 7525-5255 2528> 125 x 0.49607 Dus Tr> 0.4960 - Aa 0.504o > 0.4960 r. Thus they will cooperale