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Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price:

  Big Brew
High Price Low Price
Little Kona Enter $2 million, $3 million -$2 million, $1 million
Don't Enter $0, $8 million $0, $3 million

True or False: Both Little Kona and Big Brew have a dominant strategy in this game.

 

Which of the following outcomes represents a Nash equilibrium in this case? Check all that apply.

Big Brew maintains a low price and Little Kona enters.

Big Brew maintains a high price and Little Kona does not enter.

Big Brew maintains a high price and Little Kona enters.

Big Brew maintains a low price and Little Kona does not enter.

Big Brew threatens Little Kona by saying, 'If you enter, we're going to set a low price, so you had better stay out.'

True or False: Little Kona should not believe the threat.

 

If the two firms could collude and agree on how to split the total profits, what outcome would they pick?

Big Brew maintains a low price and Little Kona enters.

Big Brew maintains a high price and Little Kona does not enter.

Big Brew maintains a high price and Little Kona enters.

Big Brew maintains a low price and Little Kona does not enter.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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