Consider a market with two firms, Target and Wal-Mart, that sell CDs in their mu

Question

Consider a market with two firms, Target and Wal-Mart, that sell CDs in their music department. Both stores must choose whether to charge a high price ($25) or a low price ($17) for the new Miley Cyrus CD These price strategies with corresponding profits are depicted in the payoff matrix to the right. Target's profits are in red and Wal-Mart's are in blue Target Price= $25 Price= $17 Target's dominant strategy is to pick a price of $ Wal-Mart's dominant strategy is to pick a price of $ What is the Nash equilibrium for this game? 0 A. The Nash equilibrium is for Target and Wal-Mart to both choose a price of $6,000 $2,500 Price = $25 $6,000 $12,00 Wal - Mart $25 12,000 $5,500 0 B. A Nash equilibrium does not exist for this game ° C. The Nash equilibrium is for Target to choose a price of $17 and Wal-Mart Price = $17 $2,500 $5,500 to choose a price of $25 0 D. The Nash equilibrium is for Target and Wal-Mart to both choose a price of $17 The Nash equilibrium is for Target to choose a price of $25 and Wal-Mart to choose a price of $17 0 E.

Explanation / Answer

Answer
D
Dominant strategy is a strategy played by a player which is not influenced by any other players strategy
If Target choose Price=25, wal-mart to choose peice=17 because it will get higher payoff
12000>6000
if target choose price=17, wal-mart also choose price =$17 because it will get the high payoff
5500>2500
In the same way, Target also response for wal-mart strategies because the payoff is same in both situations
which means the dominat strategy of both is choose $17

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