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.
-Given the payoff matrix above,this game has __________ with __________.
A) a Nash equilibrium;both firms abiding by the agreement
B) no equilibrium;no prediction about which strategy will be chosen
C) a Nash equilibrium;both firms cheating
D) a Nash equilibrium;Bagel World cheating and Bagels 'R' Us abiding
E) a Nash equilibrium;Bagel World abiding and Bagels 'R' Us cheating

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. 
-Given the payoff matrix above,this game has __________ with __________.
A) a Nash equilibrium;both firms abiding by the agreement 
B) no equilibrium;no prediction about which strategy will be chosen 
C) a Nash equilibrium;both firms cheating 
D) a Nash equilibrium;Bagel World cheating and Bagels 'R' Us abiding 
E) a Nash equilibrium;Bagel World abiding and Bagels 'R' Us cheating

Quizplus · Accepted Answer

The game has a Nash equilibrium where both firms cheat. If BagelWorld cheats, its profit will increase from $80 to $90, assuming that Bagels'R'Us abides by the agreement, resulting in a total industry profit of $180. Similarly, if Bagels'R'Us cheats, its profit will increase from $80 to $90, assuming BagelWorld abides by the agreement, resulting in a total industry profit of $180. Thus, both firms have an incentive to cheat, and it is the dominant strategy for both firms. As a result, the game has a Nash equilibrium where both firms will cheat.

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