Question 2: Two firms are the only sellers in a market for widgets. They are simultaneously deciding how much to produce. Their options are: low output (L), medium output (M), or high output (H). When the total quantity produced in the market is low, the market carries a higher price. When deciding their quantities, the firms consider this trade off between higher prices and higher sales.
The following payoff matrix describes the profits of each firm as functions of their
Firm 2
LMH
Firm 1
L
1200 , 1200
950 , 1250
850 , 1100
M
1250 , 950
1000 , 1000
800 , 950
H
1100 , 850
950 , 800
750 , 750
A. (3 points) Identify a strictly dominated strategy for Firm 1. Justify your answer (explain which strategy strictly dominates the one you identified and why).
B. (5 points) Analyze this game using iterated deletion of strictly dominated strategies. What is/ are the outcome(s) that survive this procedure? Is this game dominance solvable?
C. (2 points) Does the outcome you identified in part B maximize the total industry profits?