Question

Suppose the only two carrot companies (Acarr and Bcarr) in Georgia that are deciding whether to charge high or low prices for their carrots. The companies' price strategies are shown in the table below. The four pairs of payoff values show what each com­pany expects to earn or lose in billions of dollars, depending on what the other company does. Acarr's Price Strategy High Price Low Price Bcarr's Price Strategy High Price Acarr +$10 Bcarr +$10 Acarr +$25 Bcarr -$5 Low Price Acarr -$5 Bcarr +$25 Acarr +$5 Bcarr +$5 If both companies believe that most consumers are soon going to quit eating carrots, and switch to beat roots, what is the equilibrium out­come?

a. Both Acarr and Bcarr will charge a high price
b. Acarr will charge a low price; Bcarr will charge a high price
c. There is no unique equilibrium for this situation
d. Both Acarr and Bcarr will charge a low price
d. Acarr will charge a high price; Bcarr will charge a low price

Answer 1

The equilibrium outcome for the carrot companies, anticipating reduced demand for carrots, would likely be both companies opting to charge a low price to maintain market share before the shift in consumer preferences.

Step-by-step explanation:

The equilibrium outcome for the pricing strategies of Acarr and Bcarr, given they anticipate a shift in consumer preferences away from carrots and towards beet roots, would likely lead to both companies charging a low price. Charging high prices would not be sensible if consumer demand is expected to drop significantly, as this would further discourage sales. If one were to charge high while the other charges low, the one with high prices would likely lose a substantial share of the dwindling market. Therefore, the dominant strategy for both would be to act preemptively and lower prices to maintain as much market share as possible before the shift in consumer demand.

In this case, the equilibrium outcome aligns with the broader economic context of perfect competition and the concept of firms producing at the level where Price equals Marginal Cost (MC), equating to the break-even point. When demand is expected to fall, firms often adjust their output and pricing strategies accordingly to remain competitive. Looking at the table, we can see that if both companies charge a high price, Acarr will earn $10 billion and Bcarr will earn $10 billion. This is the highest payoff for both companies.Therefore, both companies have an incentive to charge a high price, as it maximizes their profits.