a) Two airlines, A and B, serve a given route. Each firm can choose to charge a low ($100) or a high ($200) ticket price. If both firms set the price to be high ($200), each firm earns $80,000 in net profits per week by operating the route. If, alternatively, both firms chose to price low ($100), each firm earns $20,000 in net profits per week. If one firm charges the low price while the other charges the high price, then the firm that prices low sells more tickets and earns a higher profit of $100,000, while the firm that prices high sells fewer tickets and earns a profit of $10,000.

i.Assume that each firm makes its pricing decision without knowing what the other firm has decided to do. Draw the payoff matrix. (4 marks)

ii. Both firms have a dominant strategy. What is it, and find the Nash equilibria and the equilibrium payoffs in this game. (4 marks)