Question 59-60 are based on the following matrix

The payoff matrix above gives the profits associated with the strategic choices of two firms in an oligopolistic industry. The first entry in each cell is the profit to firm A and the second to firm B.

If the two firms collude, Firm A’s and Firm B’s profits would be which of the following?

Firm A Firm B

Question

Question 59-60 are based on the following matrix

The payoff matrix above gives the profits associated with the strategic choices of two firms in an oligopolistic industry. The first entry in each cell is the profit to firm A and the second to firm B.

If the two firms collude, Firm A’s and Firm B’s profits would be which of the following?

Firm A        Firm B

BlackTom AI · Accepted Answer

Collusion aims to maximize joint industry profit and then allocate that profit between the firms. In a two-firm pricing game the collusive outcome is a mutually agreed price/strategy pair that yields the highest total profit for the industry and is split according to the agreement (often equally if firms are symmetric).

Step 1 — identify payoffs and totals:
- If both choose High: payoffs = (100, 100). Total = 100 + 100 = 200.
- If A High, B Low: payoffs = (50, 150). Total = 50 + 150 = 200.
- If A Low, B High: payoffs = (150, 50). Total = 150 + 50 = 200.
- If both Low: payoffs = (50, 50). Total = 50 + 50 = 100.

Step 2 — reasoning about collusion:
- Collusion seeks to maximize total industry profit. The maximum total profit available in the matrix is 200 (three cells achieve this: High/High, High/Low, Low/High).
- Because the firms are symmetric and collusion implies a cooperative agreement to sustain higher prices rather than one firm undercutting the other, the natural collusive choice is the symmetric High/High outcome. That outcome yields total industry profit 200 and is symmetric (100 to each firm), making it stable under an equal-split agreement.
- Although the asymmetric cells (50,150) or (150,50) also yield total 200, those represent one firm “cheating” or obtaining a larger share by deviating; sustained collusion requires an agreed, enforceable split. With identical firms a fair collusive split is 100 and 100.

Why the correct answer is correct:
- High/High produces (100,100), which is the symmetric collusive allocation maximizing joint profit and splitting it equally.

Why other options are incorrect:
- $150; $50 and $100; $150 correspond to asymmetric outcomes where one firm gains by deviating; these are not the agreed symmetric collusive split.
- $50; $50 gives total 100, which is lower than the collusive maximum.
- $50; $100 is not a listed symmetric collusive allocation.

Conclusion: The collusive profits for Firm A and Firm B are $100; $100, matching the provided answer.

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