Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. Which of the following statements is correct?
A) It cannot be determined whether Firm A has a dominated strategy.
B) "Don't invest" is a dominated strategy for Firm A.
C) Firm A does not have a dominated strategy.
D) "Invest" is a dominated strategy for Firm A.

Question

Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below.  Which of the following statements is correct?
A) It cannot be determined whether Firm A has a dominated strategy. 
B) "Don't invest" is a dominated strategy for Firm A. 
C) Firm A does not have a dominated strategy. 
D) "Invest" is a dominated strategy for Firm A.

Quizplus · Accepted Answer

"Invest" is a dominated strategy for Firm A since regardless of whether Firm B invests or not, the payoff for "Don't invest" is higher for Firm A. Therefore, it is never rational for Firm A to choose "Invest."

Suppose Firm a and Firm B Are Considering Whether to Invest