Suppose that Boeing and Rolls-Royce Holdings are the sole producers of a particular jet engine. The two firms currently charge the same price for their products. If neither firm reduces the price of its engine, each firm earns $36 million in profit. If both firms reduce their prices, then each firm will earn $10 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $50 million while the other firm will earn a profit of $5 million. 1/ If the firms can operate as a cartel, then
A/each firm will reduce its pric
B/ each firm will maintain its current price.
C/ Boeing will reduce its price and Rolls-Royce Holdings will maintain its current price
D/ Rolls-Royce Holdings will reduce its price and Boeing will maintain its current price
2/ Assuming that collusion is not a possibility, the Nash equilibrium occurs when
A. each firm reduces its price.
B. each firm maintains its current price.
C. Rolls-Royce Holdings reduces its price and Boeing maintains its current price.
D. Boeing reduces its price and Rolls-Royce Holdings maintains its current price.
BB/ Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip’s Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel’s agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel’s agreement, then each will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the firm that abides will have a loss of $12,500.
1/ The most profitable combined outcome for the two restaurants would be
a/for both restaurants to abide by the cartel’s agreement.
b/ for both restaurants to cheat on the cartel’s agreement.
c/ for Waffle Kingdom to cheat on the agreement and Flip’s Flapjacks to abide by the agreement.
d/ There is not a profitable outcome for both restaurants.
2/The Nash equilibrium for the two restaurants would be
a/for both restaurant abide by the cartel’s agreement.
b/ for both restaurants cheat on the cartel’s agreement.
c/ for Waffle Kingdom to cheat on the agreement and Flip’s Flapjacks to abide by the agreement.
d/There is no Nash equilibrium for firms Waffle Kingdom and Flip’s Flapjacks.