The restaurant pricing game illustrated in Figure 5.1
defines customer demand functions for meals at Xavier’s (Qx) and Yvonne’s (Qy)
as Qx = 44 Profits for each firm depend in addition
on their costs of serving each customer. Suppose that Yvonne’s is able to
reduce its costs to a mere $2 per customer by completely eliminating the wait
staff (customers pick up their orders at the counter, and a few remaining
employees bus the tables). Xavier’s continues to incur a cost of $8 per
(a) Recalculate the best-response rules and the Nash
equilibrium prices for the two firms, given the change in the cost conditions.
(b) Graph the two best-response curves and describe the
differences between your graph and In particular, which curve has moved and by
how much? Explain why these changes occurred in the diagram.