Question

Consider a Caribbean cruise route served by two cruise​ lines, Carnival and Royal Caribbean. Both lines must choose whether to charge a high price ​($320​) or a low price ​($300​) to vacationers. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. ​ Carnival's profits are in red and Royal​ Caribbean's are in blue. Suppose the cruise lines decide to collude. At which outcome are joint profits​ maximized?

Answer 1

Answer:

Consider a Caribbean cruise route served by two cruise​ lines, Carnival and Royal Caribbean. Both lines must choose whether to charge a high price ​($320​) or a low price ​($300​) to vacationers. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. ​ Carnival's profits are in red and Royal​ Caribbean's are in blue. Suppose the cruise lines decide to collude. At which outcome are joint profits​ maximized?

Joint profits are maximized when Carnival picks $320 and Royal Caribbean picks $320.

Explanation:

When Carnival picks $320 and Royal Caribbean picks $320, then joint profits are maximized.

Nash equilibrium would exist only when Royal chooses $300 and the carnival chooses $300.

However, if both Carnival and Royal Caribbean charge a lower price, both of them can earn a higher profit.