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: if big brew sets a High price if big brew sets a Low price if little Kona Enters little Kona gets $3 million, big brew gets $5 million little kona gets -$1 million, big brew gets $2 million if little Kona Don't Enter little Kons gets $0, big brew gets $10 million little kona gets $0, big brew gets $4 million True or False: Only Little Kona has a dominant strategy in this game. 1. True 2. False Which of the following outcomes represents a Nash equilibrium in this case? Check all that apply. 1. Big Brew maintains a low price and Little Kona does not enter. 2. Big Brew maintains a low price and Little Kona enters. 3. Big Brew maintains a high price and Little Kona enters. 4. Big Brew maintains a high 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 believe the threat. 1. True 2. False If the two firms could collude and agree on how to split the total profits, what outcome would they pick? Big Brew maintains a high price and Little Kona does not enter. 1. Big Brew maintains a low price and Little Kona enters. 2. Big Brew maintains a low price and Little Kona does not enter. 3. Big Brew maintains a high price and Little Kona enters.

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 9PA

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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:

if big brew sets a High price if big brew sets a Low price

if little Kona Enters	little Kona gets $3 million, big brew gets $5 million	little kona gets -$1 million, big brew gets $2 million
if little Kona Don't Enter	little Kons gets $0, big brew gets $10 million	little kona gets $0, big brew gets $4 million

True or False: Only Little Kona has a dominant strategy in this game.

1. True

2. False

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

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

2. Big Brew maintains a low price and Little Kona enters.

3. Big Brew maintains a high price and Little Kona enters.

4. Big Brew maintains a high 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 believe the threat.

1. True

2. False

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

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

1. Big Brew maintains a low price and Little Kona enters.

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

3. Big Brew maintains a high price and Little Kona enters.

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