Question

Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. 

If neither restaurant cleans, each will earn $15,000; alternatively, if they both hire workers to clean, each will earn only $10,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $19,000, and the other restaurant will make only $5,000. 

Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit maximizing firms.) 

If All-You-Can-Eat Cafe and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café _______ and GoodGrub Diner _______ .

If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All-You-Can-Eat Café _______ ,and GoodGrub Diner _______ .

Answer 1

	Good Grub Diner
		Cleans up		Doesn’t clean up
All You Can Eat Café	Cleans up	$10000	$10,000	$19000	$5000
	Doesn’t clean up	$5000	$19000	$15000	$15000

If All you can eat Cafe and GoodGrub Diner decide to collude, the outcome of this game is as follows: All you can eat cafe  does not clean and GoodGrub Diner does not clean.

If both restaurants decide to cheat and behave non-cooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All you can eat Cafe cleans and GoodGrub Diner cleans. (as it is dominant strategy for both)