Question

Suppose that Airstream and Crossroads are the sole producers of a fuel-efficent recreational vehicle. The two firms currently charge the same price for their products. If neither firm reduces the price of its fuel-efficent recreational vehicle, each firm earns $30 million in profit. If both firms reduce their prices, then each firm will earn $10 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $60 million while the other firm will earn a profit of $2 million. Assuming that collusion is not a possibility, the Nash equilibrium occurs when:_________.
A. both firms will reduce their price.
B. Crossroads will reduce its price and Airstream will maintain its current price.
C. Airstream will reduce its price and Crossroads will maintain its current price
D. both firms will maintain their current price.

Answer 1

Answer:

A. both firms will reduce their price.

Explanation:

                                                                      Airstream

                                                not change price              lower price

                                                 $30 /                                 $60 /

                 not change price             $30                                    $2

Crossroads

                    lower price          $2 /                                     $10 /

                                                           $60                                    $10

Airstream's highest payoff results from lowering its prices = $60 + $10 = $70

Crossroads highest payoff results from lowering its prices = $60 + $10 = $70

Nash equilibrium exists when both Airstream and Crossroads lower their prices.