The table below shows the payoff matrix in the form of short-run profit for two firms,A and B,for two different strategies,investing in new capital or not investing.
-Refer to the payoff matrix above.The game is an example of a(n)
A) cartel.
B) indeterminate game.
C) prisoner's dilemma.
D) credible promise.
E) multiple equilibria game.

Question

The table below shows the payoff matrix in the form of short-run profit for two firms,A and B,for two different strategies,investing in new capital or not investing. 
-Refer to the payoff matrix above.The game is an example of a(n)
A) cartel. 
B) indeterminate game. 
C) prisoner's dilemma. 
D) credible promise. 
E) multiple equilibria game.

Quizplus · Accepted Answer

Both firms have a dominant strategy of investing in new capital, which leads to the highest combined profit. However, if one firm chooses not to invest while the other does, the non-investing firm gets a higher profit while the investing firm gets a lower profit. This creates a prisoner's dilemma, where the dominant strategy for each firm leads to a suboptimal outcome. Therefore, the best choice for each firm is to invest in new capital, even though the outcome is not the highest possible.

The Table Below Shows the Payoff Matrix in the Form