-The Only Two Firms in a Market Are Trying to Decide

question 70

Multiple Choice

-The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct?

• A) If Firm B sets P = $20, then Firm A will maximise its profit by setting its P = $20.
• B) Firm B's strategy is to ALWAYS set P = $20 because that gives Firm B the highest possible profit.
• C) If the firms cooperate, both could make $55,000 in economic profit.
• D) The Nash equilibrium in this game is for both firms to set P = $20 because that maximises their combined profit.
• E) If the firms play this game repeatedly, one would end up charging $20 and the other $10.

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Definitions:

Debt Investments

Investments made in securities that require the issuer to repay the principal along with interest.

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to known amounts of cash and close to their maturity.

Internal Audits

Evaluations conducted internally to assess the effectiveness of a company's operations, controls, and compliance with regulations and policies.

Collusion

An illegal agreement between parties to deceive or defraud others, often involving price-fixing or the manipulation of markets.