In a duopoly game we observe the following payouts: if the two firms collude they will each earn $50,000. If one firm cheats then he 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) Both firms cheat.
B) Only one firm will cheat.
C) Neither firm will cheat.
D) It is impossible to say.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the strategy of the other player. If both firms cheat, neither can improve their payoff by unilaterally changing their strategy, as cheating yields zero profit, which is better than the negative profit from being cheated on.

In a Duopoly Game We Observe the Following Payouts: If