Use the following to answer questions 26-28:
Table 12.16
-(Table 12.16) The payoffs represent profits measured in thousands of dollars. In this infinitely repeated game, Firm A and Firm B are both using grim trigger strategies; they agree to charge a high price in period 1. If Firm A has a change of heart and decides not to charge a high price in period 1, what is Firm A's expected payoff from cheating? Assume that d = 0.9.
A) $165,000
B) $2 million
C) $315,000
D) $580,000

Question

Use the following to answer questions 26-28:
Table 12.16 
-(Table 12.16) The payoffs represent profits measured in thousands of dollars. In this infinitely repeated game, Firm A and Firm B are both using grim trigger strategies; they agree to charge a high price in period 1. If Firm A has a change of heart and decides not to charge a high price in period 1, what is Firm A's expected payoff from cheating? Assume that d = 0.9.
A) $165,000 
B) $2 million 
C) $315,000 
D) $580,000

Quizplus · Accepted Answer

If Firm A cheats in period 1, it will earn a profit of $200,000 in period 1. In all subsequent periods, it will earn a profit of $150,000. Therefore, its expected payoff from cheating is:$200,000 + $150,000 * (1 + 0.9 + 0.9^2 + ...) = $200,000 + $150,000 * (1 / 0.1) = $200,000 + $1,500,000 = $1,700,000 = $1.7 million

Use the Following to Answer Questions 26-28