11. Two breakfast cereal manufacturers, Krunchies and Flakies, know that there i

Question

11. Two breakfast cereal manufacturers, Krunchies and Flakies, know that there is a market for a new crispy cereal and for a new sweet cereal, but neither has the resources to launch two new products. Consequently, each firm must choose one of the two new cereals to produce. If both choose Crispy, price competition drives down their profits from the introduction to $2 million for each firm. Similarly, if both choose Sweet, profits are $3 million for each firm. If one chooses Crispy while the other chooses Sweet, the one choosing Crispy earns $10 million while the other earns $15 millon. The matrix below shows the payoffs for each manufacturer in millions of dollars. Flakies CrispySweet Crispy 2,2 Sweet 15, 10 10,15 3, 3 Krunchies Consider the following combinations: L. (Crispy, Crispy) IL. (Crispy, Sweet) III. (Sweet, Crispy) IV. (Sweet, Sweet) Identify the Nash equilibrium or equilibria (if there is more than one) in this game: A. 11 and 111 B. I only O C. Iand IV D. only O E. II only F. 1 only G. 1, , 111, and

Explanation / Answer

Option A. II and III options.

The above game has two Nash equilibria.

Considering (Crispy, Sweet) case, if krunchies introduces Crispy, then best for Flakies is to introduce Sweet and if Flaky introduces Sweet, then best for Krunchies is to introduce Crispy.

Considering (Sweet, Crispy) case, if Krunchies introduces Sweet , then best for Flakies is to introduce Crispy and if Flaky introduces Crispy, then best for Krunchies is to introduce Sweet.

Thus. option A is correct.

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