Use the table below to answer the following questions.
Table 14.2.2
-Table 14.2.2 gives the payoff matrix in terms of economic profit for firms A and B when there are two strategies facing each firm: (1)charge a low price,or (2)charge a high price.In Nash equilibrium,firm A makes an economic profit of
A)-$10.
B)$2.
C)$10.
D)$20.
E)$5.

Question

Use the table below to answer the following questions.
Table 14.2.2 
-Table 14.2.2 gives the payoff matrix in terms of economic profit for firms A and B when there are two strategies facing each firm: (1)charge a low price,or (2)charge a high price.In Nash equilibrium,firm A makes an economic profit of
A)-$10. 
B)$2. 
C)$10. 
D)$20. 
E)$5.

Quizplus · Accepted Answer

In Nash equilibrium, both firms will choose their best strategy based on the other firm's strategy.

If firm A chooses to charge a low price and firm B chooses to charge a low price, they both make an economic profit of $5.

If firm A chooses to charge a low price and firm B chooses to charge a high price, firm A will make an economic profit of $2 (which is better than -$10 if A chooses to charge a high price).

If firm A chooses to charge a high price and firm B chooses to charge a low price, firm A will make an economic profit of $20 (which is better than $10 if A chooses to charge a low price).

If firm A chooses to charge a high price and firm B chooses to charge a high price, they both make an economic profit of $0.

Therefore, in Nash equilibrium, firm A will choose to charge a low price, which results in an economic profit of $2.

Use the Table Below to Answer the Following Questions