Question

A small town has only one pizzeria, the Pizza Factory. A small competitor, Perfect Pies, is thinking about entering the market. The profits of these two firms depend on whether Perfect Pies enters the market and whether the Pizza Factory-as a price leader-decides to set a high price or a low price. Use the payoff matrix below to answer the questions that follow. Perfect Pies Enter Stay out Perfect Pies makes Perfect Pies makes $10,000 High price The Pizza Factory The Pizza Factory makes $20,000 Perfect Pies makes $1,000 The Pizza Factory makes $50,000 Perfect Pies makes Low price 10 OF 20 QUESTIONS COMPLETED < 13/20 > + VIEW SOLUTION C TRY AGAIN

Answer 1

Answer 1. Dominant strategy of the pizza factory is to SET HIGH PRICES.

Reason- Whatever the perfect pie select, whether to stay out of the business or enter, pizza factory always chooses to set the price high.

Dominant strategy of the perfect pies is to ENTER.

Reason- Whatever the Pizza factory selects, whether to keep high prices or low prices, perfect pies always chooses to enter the market.

Answer 2. B. Its profits will fall.

Reason- When Perfect pies stays out, pizza factory profit is $50000. When perfect pies enter, pizza factory profit is $20000.

So the profits fall for pizza factory.

Answer 3. A. Yes because it's profits will decrease when perfect pie enters the market.

Reason- fall in Profit of pizza factory= $50000-$20000=$30000. The maximum profit of perfect pies is $10000. So pizza factory can pay $10000 to perfect pies to stay out of business. That way it can earn profit of $40000.