Use the figure below to answer the following questions 21-22: This table shows a

Question

Use the figure below to answer the following questions 21-22: This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit for Firma, Profit for Firm B). Firm B Q=10 Q=12 Firm A Q=10 (48, 48) (20, 60) Q=12 (60,20) (38, 38) 21. The Nash equilibrium for this game is A) 10 units of output for Firm A and 10 units of output for Firm B. B) 10 units of output for Firm A and 12 units of output for Firm B. c) 12 units of output for Firm A and 10 units of output for Firm B. D) 12 units of output for Firm A and 12 units of output for Firm B. 22. If these two firms agree to cooperate to maximize their joint profit, the outcome of the game will be A) 10 units of output for Firm A and 10 units of output for Firm B. B) 10 units of output for Firm A and 12 units of output for Firm B. c) 12 units of output for Firm A and 10 units of output for Firm B. D) 12 units of output for Firm A and 12 units of output for Firm B.

Explanation / Answer

Question 21

If Firm B produces 10 units of output then Firm A will produce 12 units of output as pay-off is greater in such case.

If Firm B produces 12 units of output then Firm A will produce 12 units of output as pay-off is greater in such case.

So, Firm A will always produce 12 units of output whatever be the output produced by the Firm B.

The dominant strategy of Firm A is to produce 12 units of output.

If Firm A produces 10 units of output then Firm B will produce 12 units of output as pay-off is greater in such case.

If Firm A produces 12 units of output then Firm B will produce 12 units of output as pay-off is greater in such case.

So, Firm B will always produce 12 units of output whatever be the output produced by the Firm A.

The dominant strategy of Firm B is to produce 12 units of output.

The combination of dominant strategies is the Nash equilibrium.

So, the Nash equilibrium for this game is 12 units of output for Firm A and 12 units of output for Firm B.

The correct answer is the option (D).

Question 22

It can be seen from the pay-off matrix that joint profit of the firms would be maximized if they cooperate and produce 10 units of output each.

So, if they cooperate to maximize their joint profits then the outcome of the game will be 10 units of output for Firm A and 10 units of output for Firm B.

The correct answer is the option (A).

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