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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A case study in the chapter describes a phone conversation between the presidents of American Airlines and Braniff Airways. Let’s analyze the game between the two companies. Suppose that each company can charge either a high price for tickets or a low price. If one company charges $300, it cams low profit if the other company also charges $300 and high profit if the other company charges $600. On the other hand, if the company charges $600, it cams very low profit if the other company charges $300 and medium profit if the other company also charges $600.

a. Draw the decision box for this game.

b. What is the Nash equilibrium in this game? Explain.

c. Is there an outcome that would be better than the Nash equilibrium for both airlines? How could it be achieved? Who would lose if it were achieved?

Subpart (a):

To determine
Payoff matrix.

Explanation

The two companies are American Airlines and Braniff Airways. Suppose each company can charge either a high price for tickets or a low price. Then, the decision taken can be explained by a matrix table.

Table 1 shows the decision of American Airlines and Braniff Airways.

Braniff’s Decision

Low Price Hig...

Subpart (b):

To determine
Payoff matrix.

Subpart (c):

To determine
Payoff matrix.

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