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Microeconomics
Posted 8 months ago

Prairie Glen and Mountain View sell flavored fizzy water in a market where they are the only two sellers. Both companies are considering what actions to undertake in the following week. The profit of each firm depends on the other firm's decision.

The payoff matrix shown here gives each firm's daily profits. The first entry in each cell of the payoff matrix is Prairie Glen's profit, and the second entry is Mountain View's profit.

What are the payoffs associated with a dominant strategy equilibrium and a Nash equilibrium?

Choose 1 answer:
(A) Dominant strategy equilibrium: ($2500,$500)(\$ 2500, \$ 500); Nash equilibrium: none
(B) Dominant strategy equilibrium: ($2000,$2000)(\$ 2000, \$ 2000); Nash equilibrium: ($1000,$1000)(\$ 1000, \$ 1000)
(C) Dominant strategy equilibrium: none; Nash equilibrium: ( $2500,$500)\$ 2500, \$ 500)
(D) Dominant strategy equilibrium: none; Nash equilibrium: ( $500,$2500)\$ 500, \$ 2500)
(E) Dominant strategy equilibrium: ($1000,$1000)(\$ 1000, \$ 1000); Nash equilibrium: ($1000,$1000)(\$ 1000, \$ 1000)
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Answer from Sia
Posted 8 months ago
Solution
a
Dominant Strategy: A dominant strategy is one that results in the highest payoff for a player, regardless of the opponent's action. In this case, neither Prairie Glen nor Mountain View has a dominant strategy because their best responses depend on the other firm's actions
b
Nash Equilibrium: A Nash equilibrium occurs when each player's strategy is the best response to the other player's strategy. In this payoff matrix, the Nash equilibrium is found by identifying the cell where both firms are making the best possible decision given the other firm's choice. The Nash equilibrium is ($1000,$1000)(\$1000, \$1000), where both firms price high and advertise
Answer
(B) Dominant strategy equilibrium: ($2000,$2000)(\$2000, \$2000); Nash equilibrium: ($1000,$1000)(\$1000, \$1000)
Key Concept
Dominant Strategy and Nash Equilibrium
Explanation
A dominant strategy is one that yields the highest payoff regardless of the opponent's action, but in this scenario, neither firm has a dominant strategy. The Nash equilibrium is the set of strategies where each firm's choice is the best response to the other firm's choice, which in this case is ($1000,$1000)(\$1000, \$1000).

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