Use the following to answer questions 26-28:
Table 12.16
-(Table 12.16) The payoffs represent profits in thousands of dollars. Suppose that two firms are playing an infinitely repeated game. In period 6, Firm B decides it will no longer cooperate with Firm A. If Firm A is using a grim trigger strategy, Firm A will choose:
A) a low price in period 7 and all future periods.
B) a low price in period 7 and a high price in all future periods.
C) to set price below marginal cost and drive Firm B out of the market.
D) to maintain a high price in all future periods.

Question

Use the following to answer questions 26-28:
Table 12.16 
-(Table 12.16) The payoffs represent profits in thousands of dollars. Suppose that two firms are playing an infinitely repeated game. In period 6, Firm B decides it will no longer cooperate with Firm A. If Firm A is using a grim trigger strategy, Firm A will choose:
A) a low price in period 7 and all future periods. 
B) a low price in period 7 and a high price in all future periods. 
C) to set price below marginal cost and drive Firm B out of the market. 
D) to maintain a high price in all future periods.

Quizplus · Accepted Answer

If Firm B stops cooperating, Firm A will lower its price to punish Firm B for not cooperating. However, Firm A still wants to make profits in the long run, so it will not set the price too low, which would drive itself out of the market. Therefore, the best choice would be to set a low price in period 7 and all future periods.

Use the Following to Answer Questions 26-28