Keep Quota Firm Y Cheat 2 Keep X profit $25,000 X profit--$2,000 Quota Y profit $25,000 Y profit - $50,000 Firm X 3 4 X profit $50,000 X profit - $0 Cheat Y profit --$2,000 Y profit -$0 5. (17) Consider the payoff matrix above for a Cartel Game. Each firm has to decide to stick to the agreement or cheat. They start out by both keeping the quota. This is a repeated game (with no end to the game so these are the profits for only one given year but will continue infinitely into the future) and firms can communicate with one another. Each firm must decide each year to either keep the quota or cheat and earn the profit in the equilibrium box for that year (and subsequent years). In this situation will firms have an incentive to cheat? Explain why or why not.

Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter15: Strategic Games
Section: Chapter Questions
Problem 15.6IP
Question
Keep Quota
Firm Y
Cheat
2
Keep
X profit $25,000
X profit--$2,000
Quota
Y profit $25,000
Y profit - $50,000
Firm X
3
4
X profit $50,000
X profit - $0
Cheat
Y profit --$2,000
Y profit -$0
5. (17) Consider the payoff matrix above for a Cartel Game. Each firm has to decide to stick to the agreement or cheat.
They start out by both keeping the quota.
This is a repeated game (with no end to the game so these are the profits for only one given year but will continue infinitely into the
future) and firms can communicate with one another. Each firm must decide each year to either keep the quota or cheat and earn the
profit in the equilibrium box for that year (and subsequent years). In this situation will firms have an incentive to cheat? Explain why
or why not.
Transcribed Image Text:Keep Quota Firm Y Cheat 2 Keep X profit $25,000 X profit--$2,000 Quota Y profit $25,000 Y profit - $50,000 Firm X 3 4 X profit $50,000 X profit - $0 Cheat Y profit --$2,000 Y profit -$0 5. (17) Consider the payoff matrix above for a Cartel Game. Each firm has to decide to stick to the agreement or cheat. They start out by both keeping the quota. This is a repeated game (with no end to the game so these are the profits for only one given year but will continue infinitely into the future) and firms can communicate with one another. Each firm must decide each year to either keep the quota or cheat and earn the profit in the equilibrium box for that year (and subsequent years). In this situation will firms have an incentive to cheat? Explain why or why not.
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