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3. Consider the market for graduation caps and gowns. There are only two firms in the market. They are confronted with the problem of whether

3. Consider the market for graduation caps and gowns. There are only two firms in the market. They are confronted with the problem of whether to cut prices or not, just before graduation. If both firms cut prices, then they will each earn $5 million. If Firm A cuts prices and Firm B doesn't, then Firm A earns $10 million and Firm B earns $2 million. If Firm B cuts prices and Firm A doesn't, then Firm B earns $8 million and Firm A earns $3 million. If neither cuts prices, then they each earn $7 million.

a. Set up the payoff matrix for this game.

b. What are the dominant strategies of each firm? What is the likely outcome of this game?

c. There has been a change in the market. Now, if Firm B cuts prices and Firm A doesn't, then Firm B earns $6 million and Firm A earns $3 million. Does this change the dominant strategies of the firms? Does it change the likely outcome of the game? Why?

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