Question

Consider a Caribbean cruise route served by two cruise​ lines, Carnival and Royal Caribbean. Both lines must choose whether to charge a high price ​($280280​) or a low price ​($260260​) to vacationers. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. ​ Carnival's profits are in red and Royal​ Caribbean's are in blue. Suppose the cruise lines decide to collude. At which outcome are joint profits​ maximized? Joint profits are maximized when Carnival picks $260 and Royal Caribbean picks $

Answer 1

Answer:

Joint profits are maximized when Carnival picks $260 and Royal Caribbean picks $260.

Explanation:

                                                 Royal Caribbean

                                   high price                   low price

                                  $9,000 /                  $14,720 /

              high price                 $9,000                    $1,620

Carnival

              low price     $1,620 /                   $8,320 /

                                               $14,720                    $8,320

Carnival's dominant strategy is to charge a low price ($260) because it yields the highest profits = $14,720 + $8,320 = $23,040.

Royal Caribbean's dominant strategy is to charge a low price ($260) because it yields the highest profits = $14,720 + $8,320 = $23,040.

Since both companies have the same dominant strategy, a Nash equilibrium exists when they both charge a low price ($260).