Question

Two​ firms, A and B​, must each choose either a low price or a high price for their product. The payoff matrix shows the profit each firm would make with the various price combinations. Profits are in millions of​ dollars, and Firm A​'s profit is on the left and Firm B​'s profit is on the right side of each cell.
Firm B
Low price
High price

Firm A
Low price
​5, 6
​8, 4
High price
​3, 8
​7, 7
If the firms cannot cooperate with each other and must choose​simultaneously, what price will they​ choose?

A.Both firms will choose the low price.
B. Firm A will choose the low price and Firm B will choose the high price.
C. Both firms will choose the high price.
D. Firm A will choose the high price and Firm B will choose the low price.

If the firms could cooperate with each​ other, what price would they​ choose?
A. Both firms would choose the low price.
B. Both firms would choose the high price.
C. Firm A would choose the low price and Firm B would choose the high price.
D. Firm A would choose the high price and Firm B would choose the low price

Answer 1

Answer: 1. A.Both firms will choose the low price.

2. B. Both firms would choose the high price.

Explanation:

1. If the firms cannot cooperate with each other and must choose simultaneously, both firms will choose the low price.

This is because at the low price both of them are at the highest profit they can make when they are not cooperating. For instance, if Firm B chooses Low Price and Firm A chooses High Price, Firm A will make $3 million while Firm be will make $8 million.

If Firm B decides to have a high price then firm A will take the low price and make $8 million in profit while Firm B makes $4 million. If they are not working together, they will both have to take the low price to make the most profit.

2. If the firms could cooperate with each​ other, both firms would choose the high price.

The is because they will be making more than competing and getting a lower profit. Should they cooperate they will each get $7 million in profit because they will pick the option they can both make the highest profit at. The is better than competing and making only $5 and $6 million respectively.

If you need any clarification do comment. Cheers.