The market for bagels in Charlottetown,PEI contains two firms: BagelWorld (BW)and Bagels'R'Us (BRU).The owners of the two firms decide to fix the price of bagels.The table shows the total revenue the firms will collect if they abide by the price-setting agreement or if they cheat on the agreement.
-Based on the payoff matrix above,Bagel World finds that __________ is its __________.
A) abiding by the agreement;dominant strategy
B) cheating on the agreement;dominated strategy
C) either cheating or abiding;dominant strategy
D) cheating on the agreement;dominant strategy
E) either cheating or abiding;dominated strategy

Question

The market for bagels in Charlottetown,PEI contains two firms: BagelWorld (BW)and Bagels'R'Us (BRU).The owners of the two firms decide to fix the price of bagels.The table shows the total revenue the firms will collect if they abide by the price-setting agreement or if they cheat on the agreement. 
-Based on the payoff matrix above,Bagel World finds that __________ is its __________.
A) abiding by the agreement;dominant strategy 
B) cheating on the agreement;dominated strategy 
C) either cheating or abiding;dominant strategy 
D) cheating on the agreement;dominant strategy 
E) either cheating or abiding;dominated strategy

Quizplus · Accepted Answer

Bagel World's dominant strategy is to cheat on the agreement, as it will result in a higher payoff regardless of what BRU chooses to do. If BRU also cheats, BW will receive $70,000 instead of $60,000 if they had abided by the agreement. If BRU abides by the agreement, BW still receives a higher payoff of $80,000 instead of $70,000 if they had abided by the agreement. Therefore, cheating is BW's best choice.

The Market for Bagels in Charlottetown,PEI Contains Two Firms: BagelWorld