Two firms operating in the same market must choose between a collude price and a cheat price.Firm A's profit is listed before the comma,B's outcome after the comma. If each firm tries to choose a price that is best for it,regardless of the other firm's price,which of these statements is correct?

Question

Two firms operating in the same market must choose between a collude price and a cheat price.Firm A's profit is listed before the comma,B's outcome after the comma.  If each firm tries to choose a price that is best for it,regardless of the other firm's price,which of these statements is correct?

Quizplus · Accepted Answer

If each firm chooses a price that is best for it, regardless of the other firm's price, both firms will choose the cheat price. This is because if Firm A chooses the collude price, Firm B will choose the cheat price and earn a higher profit. Similarly, if Firm B chooses the collude price, Firm A will choose the cheat price and earn a higher profit. Thus, the best choice for both firms is to choose the cheat price, resulting in D being the correct answer.

Two Firms Operating in the Same Market Must Choose Between