Show all work and steps to get right answer. Two firms in a market sell identica
ID: 1118154 • Letter: S
Question
Show all work and steps to get right answer.
Two firms in a market sell identical goods and charge a price of $5 per unit. However, the cost of a crucial input used in producing these goods has increased. As a result, both firms are considering increasing the price of the good to $6. If the firms do not raise their prices at the same time, the firm that raises the price stands to lose market share. The payoff matrix shows their respective payoffs on the basis of the prices charged by them. Here, payoffs denote the number of units sold by each firm. The first number listed in each cell is the payoff to the row player and the second number listed is the payoff to the column player. Firm 2 price $5 50, 50 0, 100 price $6 100, price-$5 Firm 1 price $6 40, 40 Refer to the scenario above. Which of the following is true? A. The dominant strategy equilibrium is the Nash equilibrium. O B. This game does not have a Nash equilibrium. OC. Nash equilibrium occurs if Firm 1 charges a price of $5 and Firm 2 charges a price of $6 D. Nash equilibrium occurs if Fim 1 charges $6 and Firm 2 charges $5Explanation / Answer
As per the payoff matrix if any of the player increases prices its number of units sold will reduce to zero if other firm do not raise prices simultaneously.
Nash equilibrium is a optimal output when there is no incentive to any player to changes its position.
So there woul be no Nash equilibrium is one firm increases and other firm do not as it will reduce its number of units sold to 0.
Dominant strategy is a strategy when a player strategy is such that other player's strategy would not affect position of player 1.
In this case there is no incentive for a player to move from price 5 to price 6 as number number of units sold would be reduced.
Price of $5 is also dominant strategy as what price other player is charging would not reduce the number of units sold of the firm.
Therefore, in this case dominant strategy equilibrium is the Nash equilibrium.
Answer is option 'A'