-Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game,the dominant strategy for A is to

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Quizplus · Accepted Answer

The dominant strategy is the one that results in the highest payoff regardless of the other player's strategy. In this scenario, regardless of whether Firm B cheats or stands by the agreement, Firm A earns a higher payoff by cheating ($8 million if B stands by the agreement, $2 million if B also cheats) than by standing by the agreement ($5 million if B stands by the agreement, -$2 million if B cheats).