Agile Airlines is earning $5.0 million a year economic profit on a route on whic
ID: 1124140 • Letter: A
Question
Agile Airlines is earning $5.0 million a year economic profit on a route on which it has a monopoly Agile strategies (red squares) Wanabe Airlines is considering entering the market and operating on this route Agile threatens to cut the price to the point at which Wanabe will make no profit if it enters. Wanabe determines that the payoff matrix for the game with Agile is the one shown in the table. High price Low price 3.5 0.5 Wanabe Enter 2.5 >>>The numbers given are in millions of dollars. strategies (blue squaes) Don't 5.0 2.5 enter Wanabe believe Agile's threat because- the market because Wanabe 0 A does not enter; it will incur an economic loss O B C. does not enter, it will only break even if it enters, and it isn't worth the effort 0 D. A, does not; Agile will charge a higher price regardless of wanabe's decision does not; Agile will charge a higher price if Wanabe enters the market and a lower price if it doesn't does; it makes good economic sense does: Wanabe would do the same thing if roles were reversed B entersit will receive profit of $2.5 million rather than zero ° C. O D. enters, it will receive profit of $3.5 million rather than zeroExplanation / Answer
Answer:
1.) A.) Does not, Agile will charge a higher price regardless of wanabe's decision.
Note that Agile has a dominant strategy of " High price". Remember that a strategy is dominant if, regardless of what any other players do, the strategy earns a player a higher payoff than some other strategy.So, Agile will chargew high price irrespective of decision of Wanabe's strategy.
2.) B.) enters, receive a profit of $2.5 million rather than zero.
With Agile has dominant strategy of "high price", Wanabe enters the market because there is no creadibility in Agile's threat to cut down price if Wanabe enters the market.thus, Wanabe earns a profit of $2.5 million.