Practice Problems Bud and Wise are the only two producers of a New Age beer, which is designed to displace root beer. Bud and Wise are trying to work out the quantity to produce. They know that if:
• Both limit production to 10,000 gallons a day, they will make the maximum attainable joint profit of $200,000 a day—$100,000 a day each.
• One produces 20,000 gallons a day while the other produces 10,000 a day, the one that produces 20,000 gallons will make an economic profit of $150,000 and the one that sticks with 10,000 gallons will incur an economic loss of $50,000.
• Both produce 20,000 gallons a day, each will make zero economic profit.
1. Construct a payoff matrix for the game that Bud and Wise must play.
2. Find the Nash equilibrium of the game that Bud and Wise play.
3. What is the equilibrium of the game if Bud and Wise play it repeatedly?