Managerial Economics & Business Strategy 7th Edition by Michael Baye, Stanley Brue, David MacPherson

Exercise 2

In a two-player, one-shot simultaneous-move game each player can choose strategy A or strategy B. If both players choose strategy A , each earns a payoff of $500. If both players choose strategy B, each earns a payoff of $100. If player 1 chooses strategy A and player 2 chooses strategy B, then player 1 earns $0 and player 2 earns $650. If player i chooses strategy B and player 2 chooses strategy A, then player 1 earns $650 and player 2 earns $0.
a. Write the above game in normal form.
b. Find each player's dominant strategy, if it exists.
c. Find the Nash equilibrium (or equilibria) of this game.
d. Rank strategy pairs by aggregate payoff (highest to lowest).
e. Can the outcome with the highest aggregate payoff be sustained in equilibrium Why or why not