Problem
Answer all questions. Your answers must be clear and complete. Furthermore, you must support your explanations or conclusions in terms of the dollar amount gained or lost for particular strategic choices or moves.
I. Two Italian restaurants A and B, compete by price. Each restaurant can choose either a low price or a high price per dish. Resulting profits (in thousands of dollars) per month are given by the following payoff matrix.
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Restaurant B
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Low Price
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High Price
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Restaurant A
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Low Price
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$200 $500
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$600 $600
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High Price
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$0 $1,100
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$400 $1,000
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II. Suppose, the payoff matrix remaining the same, Restaurant A gets to move first and announces its pricing strategy before Firm 2.
i. Construct (draw) an extensive-form game diagram for this sequential game.
ii. What is the Nash equilibrium in this (sequential) game? Explain how you arrived at your answer.