Reference: Ref 15-07 (Figure: Payoff Matrix for Jake and Zoe) Jake and Zoe are t
ID: 1165515 • Letter: R
Question
Reference: Ref 15-07
(Figure: Payoff Matrix for Jake and Zoe) Jake and Zoe are the only producers of slushies in Vacatown. Each week, each firm decides whether to price high or price low for the following week. The figure shows the profit per week earned by the two firms. What is the Nash equilibrium for Jake and Zoe?
Jake prices low; Zoe prices low
Jake prices high; Zoe prices high
Jake prices low; Zoe prices high
Jake prices high; Zoe prices low
A.Jake prices low; Zoe prices low
B.Jake prices high; Zoe prices high
C.Jake prices low; Zoe prices high
D.Jake prices high; Zoe prices low
Explanation / Answer
Given jake chooses to charge a high price best response of zoe is to charge a low price. While given jake chooses to charge a low price zoe would charge a low price to maximize his profit. So low price is the dominant strategy of zoe. Given zoe charges a high price best option for jake is to charge low price. While given zoe charges low price best option for jake is to charge a low price. Hence charging low price is the dominant strategy of jake. Hence the Nash equilibrium is that both charge low price. (A).
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