1st make a chart
(A) If Red chooses a location south of the city, which location is better for Blue? Explain.
If red goes South, then Blue should go North as $4000 > $1000
(B) Is choosing a location to the South of the city a dominant strategy for Red Shop? Explain.
Red shop has no dominant strategy and neither does Blue. Both are better off doing the opposite of the other's choice.
(C) If the two firms cooperate in choosing locations, where will each firm locate?
If they cooperate they will collude and choose the locations that give off the biggest payoff.
(D) Assume that the South suburb has enacted an incentive package to attract new businesses. Any firm firm that locates south of the city will receive a subsidy of $2000 per day. Redraw the payoff matrix to include the subsidy.