Question

8. Assume there are two firms - Burger King and McDonald's. Further assume that these are the only two firms in the fast food hamburger industry and that each wants to maximize their own profits. The following competitive scenarios exist for these two firms: If they reach an agreement to lower prices on production levels, Burger King will make $10 million in economic profits and McDonald's will make $14 million. If Burger King does not lower the price (cheats) on the agreement and McDonald's lowers the price (does not cheat), then Burger King will earn $2 million in economic profits; while McDonald's' economic profits will be $30 million. If McDonald's does not lower the price (cheats on the agreement) and Burger King lowers the price (does not cheat), then McDonald's will earn $15 million in economic profits; while Burger King's economic profits will be $12 million. If the agreement breaks down completely (neither lowers the price) Burger King will make an economic profit of $9 million and McDonald's will make an economic profit of $13 million. a. Fill in the payoff matrix below, making sure you label everything. (5 points) b. What (if any) is the dominant strategy for Burger King? (5 points) c. What (if any) is the dominant strategy for McDonald's? (5 points)

          8. Assume there are two firms - Burger King and McDonald's. Further assume that these are the only two firms in the fast food hamburger industry and that each wants to maximize their own profits. The following competitive scenarios exist for these two firms:

If they reach an agreement to lower prices on production levels, Burger King will make $10 million in economic profits and McDonald's will make $14 million. If Burger King does not lower the price (cheats) on the agreement and McDonald's lowers the price (does not cheat), then Burger King will earn $2 million in economic profits; while McDonald's' economic profits will be $30 million. If McDonald's does not lower the price (cheats on the agreement) and Burger King lowers the price (does not cheat), then McDonald's will earn $15 million in economic profits; while Burger King's economic profits will be $12 million. If the agreement breaks down completely (neither lowers the price) Burger King will make an economic profit of $9 million and McDonald's will make an economic profit of $13 million.

a. Fill in the payoff matrix below, making sure you label everything. (5 points)

b. What (if any) is the dominant strategy for Burger King? (5 points)

c. What (if any) is the dominant strategy for McDonald's? (5 points)

8. Assume there are two firms - Burger King and McDonald's. Further assume that these are the only two firms in the fast food hamburger industry and that each wants to maximize their own profits. The following competitive scenarios exist for these two firms:

If they reach an agreement to lower prices on production levels, Burger King will make 10 million in economic profits and McDonald's will make14 million. If Burger King does not lower the price (cheats) on the agreement and McDonald's lowers the price (does not cheat), then Burger King will earn 2 million in economic profits; while McDonald's' economic profits will be30 million. If McDonald's does not lower the price (cheats on the agreement) and Burger King lowers the price (does not cheat), then McDonald's will earn 15 million in economic profits; while Burger King's economic profits will be12 million. If the agreement breaks down completely (neither lowers the price) Burger King will make an economic profit of 9 million and McDonald's will make an economic profit of13 million.

a. Fill in the payoff matrix below, making sure you label everything. (5 points)

b. What (if any) is the dominant strategy for Burger King? (5 points)

c. What (if any) is the dominant strategy for McDonald's? (5 points)

Added by Amy U.

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