Its dominant strategy is medium prices. Firm 1 does not have a dominant strategy
ID: 1117281 • Letter: I
Question
Its dominant strategy is medium prices.
Firm 1 does not have a dominant strategy.
Its dominant strategy is high prices.
Its dominant strategy could be low or medium prices depending on Firm 2’s response.
Its dominant strategy is low prices.
A)Its dominant strategy is medium prices.
B)Firm 1 does not have a dominant strategy.
C)Its dominant strategy is high prices.
D)Its dominant strategy could be low or medium prices depending on Firm 2’s response.
E)Its dominant strategy is low prices.
m 2 Firm High MediumLo High Medium .3 2.0 5, 2 LowExplanation / Answer
A dominant strategy is a strategy that the player plays regardless of what the other player does. In the above question, the answer is E: Its dominant strategy is low prices.
Suppose firm 1 believes that firm 2 will play high, then its best response is to play low as it gives the highest payoff (5>3>2). When firm 1 believes that firm 2 will play medium, then his best response is to play low as it gives the highest payoff (7>5>4). When firm 1 believes that firm 2 will play low, then his best response is to paly low as it gives the highest payoff (5>3>2). Therefore, regardless of what firm 2 is playing, firms 1's best response is to play low. Thus, firm 1's dominant strategy is low prices (E)
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