Low High Firm1 Low -20-30 900,600 High 100,800 50,50 a.What outcomes,if any,are Nash equilibria? A Nash equilibrium exists when neither party has an incentive to alter its strategy taking the other's strategy as given.If Firm 2 chooses low and Firm 1 chooses High neither will have an incentive to change (100>-20 for Firm 1 and 800>50 for Firm 2).If Firm 2 chooses High and Firm 1 chooses low.neither will have an incentive to chang (Firm 1 and60>0for Firm 2).Both outomes are Nash equilibria.Bot firms choosing low is not a Nash equilibrium because,for example,if Firm 1 chooses low then firm 2 is better off by switching to high since 600 is greater than-30. b.If the managerof each firm is conservative and each follows a maximin strategy, what will be the outcome? If Firm 1 chooses Low,its worst payoff,-20.would occur if Firm 2 chooses Low.If Firm 1 chooses High,its worst payoff,50,would occur if Firm 2 chooses High.Therefore,with a onservat e maximin s strategy,Firm High.Similarly,if Firm 2chooses Low,its worst payoff,30.would occur ifFirm 1chooses Low.If Firm2 chooses High its worst payoff 50,would occur if Firm I chooses High.Therefore,with a maximin strategy,Firm 2chooses High.Thus,both firms choose High,yielding a payoff of50 for both. c.What is the cooperative outcome? The cooperative outcome woul maximize joint payoffs.This would occur if Firm 1 goes for the low end of the market and Firm 2 goes for the high end of the market.The joint payofis 1,500 (Firm 1 gets 900 and Firm 2 gets600) d.Which firm benefits most from the cooperative outcome?How much would that firm need to offer the other to persuade it to collude? Firm I benefits most from cooperation.The difference betweenits best payoffunder cooperation and the next best=800.To persuade Firm 2 to choose Firm 8 best option,Firm 1 must offer at least the difference between Firm 2s payoff under cooperation. 600,and its best payoff,800,i.e.,200.However,Firm 2 realizes that Firm 1 benefits muchLow High a. What outcomes, if any, are Nash equilibria? A Nash equilibrium exists when neither party has an incentive to alter its strategy, taking the other’s strategy as given. If Firm 2 chooses Low and Firm 1 chooses High, neither will have an incentive to change (100 > -20 for Firm 1 and 800 > 50 for Firm 2). If Firm 2 chooses High and Firm 1 chooses Low, neither will have an incentive to change (900 > 50 for Firm 1 and 600 > -30 for Firm 2). Both outcomes are Nash equilibria. Both firms choosing low is not a Nash equilibrium because, for example, if Firm 1 chooses low then firm 2 is better off by switching to high since 600 is greater than -30. b. If the managerof each firm is conservative and each follows a maximin strategy, what will be the outcome? If Firm 1 chooses Low, its worst payoff, -20, would occur if Firm 2 chooses Low. If Firm 1 chooses High, its worst payoff, 50, would occur if Firm 2 chooses High. Therefore, with a conservative maximin strategy, Firm 1 chooses High. Similarly, if Firm 2 chooses Low, its worst payoff, -30, would occur if Firm 1 chooses Low. If Firm 2 chooses High, its worst payoff, 50, would occur if Firm 1 chooses High. Therefore, with a maximin strategy, Firm 2 chooses High. Thus, both firms choose High, yielding a payoff of 50 for both. c. What is the cooperative outcome? The cooperative outcome would maximize joint payoffs. This would occur if Firm 1 goes for the low end of the market and Firm 2 goes for the high end of the market. The joint payoff is 1,500 (Firm 1 gets 900 and Firm 2 gets 600). d. Which firm benefits most from the cooperative outcome? How much would that firm need to offer the other to persuade it to collude? Firm 1 benefits most from cooperation. The difference between its best payoff under cooperation and the next best payoff is 900 - 100 = 800. To persuade Firm 2 to choose Firm 1’s best option, Firm 1 must offer at least the difference between Firm 2’s payoff under cooperation, 600, and its best payoff, 800, i.e., 200. However, Firm 2 realizes that Firm 1 benefits much -20, -30 900, 600 100, 800 50, 50 Firm 1 Low High