Question

Version B Table 2 Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work each firm must agree to refrain from advertisins. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither Tirm advertises, the cost savings will outweigh the lost sales. The table below lists each firms each firm se its profits if botr energy drinks.erdrink (Firm W) an fireasing the destee to refrain the reduced their cum determines ther Hank's Hydra Individual proes, the cost s the firm's en vertising. Each tising budgets. But could lower its * savings will outerey drinks, but en believes that advene plan to work, Firm H Breaks agreement and advertises Maintains agreement and does not advertise Firm W Breaks agreement and advertises Firm W's profit = $16,000 Firm H's profit = $5,000 Firm W's profit = $24,000 Firm H's profit = $4,500 Maintains agreement and does not advertise Firm W's profit $14,000 Firm H's profit - $11,000 Firm W's profit - $23,500 Firm H's profit $10,500 26. Refer to Table 2: Does either Firm W or Firm H have a dominant strategy? a) Both Firm W and Firm H have a dominant strategy. b) Neither Firm W nor Firm H has a dominant strategy. c) Firm W has a dominant strategy, but Firm H does not. d) Firm w does not have a dominant strategy, but Firm H does. b) Neither and Firm H have a domin have a dominant strateeva 27. An agreement among firms in a market about quantities to produce or prices to charge is called a) collusion c) dominant strategy. b) a Nash equilibrium d) behavioral economics.

Answer 1

26. When Firm H chooses Breaks agreement and advertises, then Firm W has more profit in choosing Breaks agreement and advertises.

And When Firm H chooses to Maintains agreement and does not advertise , then Firm W has more profit in choosing Breaks agreement and advertises.

This implies Firm W has a dominant strategy in Breaks agreement and advertises.

Similarly, When Firm W chooses to Breaks agreement and advertises, then Firm H has more profit in choosing Breaks agreement and advertises.

And When Firm W choose to Maintains agreement and does not advertise, then Firm H has more profit in choosing Breaks agreement and advertises.

This implies Firm H has a dominant strategy in Breaks agreement and advertises.

Hence, option(A) is correct i.e both Firm W and Firm H have a dominant strategy.

27. An agreement among firms in a market about quantities to produce or prices to charge is called collusion. Hence, option(A) is correct.

Answer 2

26. 

Checking the dominant strategy of H.

Keeping W constant at breaking the agreement and advertising, H will choose to maintain the agreement and not advertise. And similarly keeping W constant at maintaining the agreement and not advertising, H would still choose to maintain the agreement and not agreement. Therefore in either case H has a dominant strategy to maintain the agreement and not advertised. 

 

Checking the dominant strategy of W

Secondly doing the same for W. If we keep H constant at breaking the agreement, W would choose to break the agreement, since it is favoring him. Again if we keep H constant at maintaining the agreement and not advertise, W would still choose to break the agreement and advertise. Either way, whatever the move of H, it is in the favor of W that he breaks the agreement and advertises. Therefore W has dominant strategy to Break the agreement and advertise. 

 

Option A is correct. Both Firm W and Firm H have a dominant strategy.

27. An agreement amount firms in a market about quantities to produce or prices to change is called collisions. 

Therefore option A is correct.