The payoff matrix presents the profits for Firms X and Y under their two individual pricing strategies. Suppose both firms have agreed to maximize their combined profits by colluding on their pricing strategies. Use the information in this payoff matrix to answer the two questions.

Firm X strategy
Firm Y strategy Low price High price
Low price Firm X Profit = 73
Firm Y Profit = 73 Firm X Profit = 47
Firm Y Profit = 103
High price Firm X Profit = 103
Firm Y Profit = 47 Firm X Profit = 81
Firm Y Profit = 81
Compare the profits of Firm X when both firms respect the collusive agreement to the profits of Firm X when Firm X secretly cheats on the agreement. How much additional profit would Firm X earn by secretly cheating on the agreement to collude? Round your answer to the nearest whole number.

$

Compare the profits of Firm Y when both firms respect the collusive agreement to the profits of Firm Y when both firms cheat on the agreement. By how much would the profits of Firm Y fall if both firms cheat on the agreement to collude? Round your answer to the nearest whole number.

$

If the row player has n strategies and the column player has m strategies, the number of cells in the matrix must be n m, and there must be a total of 2 n m reward values.

Explanation:

If both firms collude, they will agree to charge a high price for the commodity because it will result in a bigger profit for both enterprises, i.e. $ 81 each. When firm X cheats, it means that firm X charges a low price.

Now, X's profit is 103, whereas Y's profit is 43.

Additional profit earned by firm X = 103 - 81 = $ 24

If both firms collude, they will agree to charge a high price for the commodity because it will result in a bigger profit for both enterprises, i.e. $ 81 each. When both firms deceive, both firms demand a cheap price.

Both firms' payout is now $ 73.

Fall in profit of Firm Y = 81 - 75 = $ 6

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