1. Consider two competing firms that each have the choice between two strategies: setting the joint-profit maximizing price (i.e., cartel price) or setting a low price. When firms "collude," they both set the cartel price, when firms "defect," they both set a low price. The payoffs of each firm are given in the payoff matrix below.

Firm B Cartel price (C) Low price (L) Firm A Cartel 100, 100 10, 110 price (C) Low 110, 10 30, 30 price (L) Payoffs = profits (firm A, firm B)Round Firm A Firm B Action Payoff Action Payoff 2 3 4 U 7 8 Total Payoff\fRound Firm A Firm B Action Payoff Action Payoff 2 3 4 5 6 7 8 Total Payoff