Suppose Coca-Cola and Pepsi-Cola, who do not communicate, are engaged in a sales game and each firm seeks to maximize profit. The firms set high price or low price. If both set high price, each makes $50 profit. If one sets a low price and the other a high price, the high-price firm makes $200 profit and the low-price firm makes $0. If both set low price, then each makes $75 profit.

What would be the equilibrium outcome of this game? Would the equilibrium outcome be better off or worse off to both Coca-Cola and Pepsi-Cola? Explain why. Illustrate your answer with the payoff matrix for both firms. (5 marks)

INSTRUCTIONS

1.Type your answer to each part of the question. CLEARLY LABEL EACH PART

2.Draw your diagram by hand on a piece of paper, take photo of the diagram and upload as an attachment. (Make sure you referred to the diagram in your typed explanation.)