For the next two questions, consider the game described here. You might want to
ID: 1117613 • Letter: F
Question
For the next two questions, consider the game described here. You might want to write out a payoff matrix from the information given below.
Consider two kids, Joe (the same Joe as before? Who can say. Either way, none of the information from the previous game applies.) and Bob, who are the only kids in the area who sell lemonade and thus form a local duopoly (oligopoly with two firms). Each is considering one of two strategies to bring in new customers: Plan A involves making new advertising banners and placing them around the neighborhood, and Plan B involves giving out a punch card that allows customers to get a free lemonade once they've bought four of them.
If both use Plan A, Joe will earn profits of $180 while Bob will earn $120. If both use Plan B, Joe's profits will be $70 and Bob's $55. If Joe uses A while Bob uses B, Joe will have profits of $100 and Bob $75; if Joe uses B while Bob uses A, Joe will have profits of $135 and Bob $80.
Describe the Nash equilibrium:
(Joe: A, Bob: B)Explanation / Answer
It can be seen that Joe has a dominant strategy - Plan A (No matter what Bob chooses, Joe gets a higher payoff when he chooses plan A)
Similarly, Bob also has a dominant strategy - Plan A
Nash equillibrium: (Joe: A, Bob: A)
(Option 3 is correct)
Bob Plan A Plan B Joe Plan A $180 , $120 $100 , $75 Plan B $135 , $80 $70 , $55