In a duopoly game we observe the following payoffs: if the two firms collude they will each earn
$50,000. If one firm cheats then it earns $60,000 and the other firm earns - $10,000. If both firms cheat then they each earn zero economic profit. In this game what is the Nash equilibrium?
A) Only one firm will cheat.
B) Neither firm will cheat.
C) Both firms cheat.
D) It is impossible to say.

Question

Quizplus · Accepted Answer

The Nash equilibrium occurs when both firms choose the best strategy given the other firm's strategy. Here, if one firm decides to cheat, the best response for the other firm is also to cheat to avoid the -$10,000 loss. Thus, both firms cheating is the Nash equilibrium, as neither can unilaterally change their strategy without being worse off.

In a Duopoly Game We Observe the Following Payoffs: If