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

Carnival and Royal Caribbean can collude to set prices and act like a monopoly, which involves reducing output and raising prices to maximize profits.

Step-by-step explanation:

In the scenario presented, Carnival and Royal Caribbean have the option to collude and set their prices to maximize joint profits. Collusion would involve agreeing to charge the same price to eliminate competition and act like a monopoly.

When firms collude in such a manner, they tend to reduce output and increase prices to maximize profits, just like a monopolist would. In the context of a payoff matrix, colluding to charge a higher price would typically result in higher joint profits when compared to both firms charging a low price.

For a perfectly competitive firm, the goal is to maximize profit by finding the level of output where total revenue exceeds total costs by the greatest amount, as demonstrated by the provided example of a raspberry farm with revenue and costs data.

Answer 2

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.

Step-by-step 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.