Question

Consider the following information for a simultaneous move game: If you charge a low price (LP) and your rival charges a LP, you each earn $5 million in profits. If both charge a high price (HP), each will each earn $10 million in profits. However, if one charge a LP and the other does not, the firm that charges a LP will earn $15 million and the other firm will earn $1 million. ​ What is the Nash equilibrium of the game? a. ​Each firm charges a LP b. ​Each firm charges a HP c. ​You charge a LP and your rival charges a HP d. ​None of the above.

Answer 1

Answer: B. Each firm Charges a HP

Explanation:

Nash Equilibrium is a point where there is no incentive from deviating for each firm to deviate or change its strategy.

Firms reach Nash Equilibrium Point when they both charge high price (HP). When both firms charge high price (HP) each firm will earn 10 million dollars at this point there is no incentive for either firm to change and charge lower price because they will earn $ 1 million. Each firm will just choose to charge high price regardless of what the other firm is doing.