A consumer considers buying a new brand of a mobile phone. The manufacturer decides on the quality of the phone. If the manufacturer uses high quality components, the phone lasts forever. If she uses low quality components, the phone breaks after 1 year in use. High quality components cost 150 EUR more for the manufacturer and low quality components cost only 50 EUR. The high quality phone is worth 300 EUR for the consumer. A low quality phone is worth 100 EUR. The sales price for the new phone is set at 200 EUR. Consider now a game where the consumer chooses to buy or not to buy (B or N) and the manufacturer decided the quality (if the buyer does not buy, then she does not make any payments and the manufacturer does not pay for any components).

(a) Draw the game matrix for this game.

(b) Explain the meaning of Dominant strategy equilibrium and Nash

equilibrium. Does either of the players have a dominant strategy?

Is there a dominant strategy equilibrium?

(c) Are there any Nash equilibria? Is there a Pareto-efficient Nash

equilibrium?

(d) How does the situation change if the seller can give a money back

guarantee for the product (i.e. pay back the price if the phone

breaks)?