Firm A\'s strategies P= $10 P=$20 $40 $35 $10 $40 $60 Firm B\'s strategies $60 $

Question

Firm A's strategies P= $10 P=$20 $40 $35 $10 $40 $60 Firm B's strategies $60 $55 P=$20 $35 $55 The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct? O A. If the firms play this game repeatedly, one would end up charging $20 and the other $10. O B. Firm B's strategy is to always set P= $20 because that gives Firm B the highest possible profit O c The Nash equilibrium in this game is for both firms to set P-S20 because that maximizes their combined profit O D. If the firms cooperate, they could both earn $55,000 in economic proft O E. If Firm B sets P- $20, then Firm A will maximize its profit by setting its P-$20

Explanation / Answer

Option D is correct

Firms would look to maximize their profits by cooperating with each other and would both earn $55000 in economic profit.

(Nash equilibrium - Both firms would charge $10 , this is the dominant strategy of both the players)

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