se the information in the following table, which summarizes the payoffs (i.e., p
ID: 1252538 • Letter: S
Question
se the information in the following table, which summarizes the payoffs (i.e., profit) to two firms that must decide between an averageFirm 2
Average Quality
High Quality
Firm 1
Average Quality
600, 600
400, 1100
High Quality
1100, 400
900, 900
a. What is each player's dominant strategy? Explain your reasoning.
b. Referring to the table above, is this an example of a prisoner's dilemma game? Why or why not?
c. Is there a Nash equilibrium? If so, what is it?
-quality and a high quality product, to answer the questions that follow
Explanation / Answer
a. What is each player's dominant strategy? Explain your reasoning. Each player has a dominant strategy to choose Average Quality. For Firm 1's decision, if Firm 2 chooses Average, Firm 1 wants to choose Average (400 vs 600). If Firm 2 chooses, High, Firm 1 wants to choose Average (1100 vs 900). So, no matter what Firm 2 does, Firm 1 wants to choose Average. For Firm 2's decision, if Firm 1 chooses Average, Firm 2 should choose Average (600 vs 400). If Firm 2 chooses High, Firm 1 should choose Average (1100 vs 900). So, no matter what Firm 1 does, Firm 2 should choose Average. b. Referring to the table above, is this an example of a prisoner's dilemma game? Why or why not? Yes, this is an example of a prisoner's dilemma game. We end up at an equilibrium (Average, Average), like (Confess, Confess) that is less desirable to both parties than a cooperative outcome (High, High), like (Silent, Silent). We do not cooperate because both players have an incentive to cheat (to move from 900 to 1100), that keeps us from reaching the cooperative outcome. c. Is there a Nash equilibrium? If so, what is it? Yes, there is a Nash Equilibrium at (Average, Average) since both players have a dominant strategy to choose Average.
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