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 will 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.1. If both firms plan to be in business for one‐year, the Nash Equilibrium will be:a) For each firm charge LPb) For neither firm to charge LPc) For one firm to charge LP and the other HPd) None of the above.

Answer 1

Answer:

The correct answer is the option A: For each firm charge LP.

Explanation:

To begin with, the theory called ''Nash Equilibrium'' in the field of economics, refers to a type of equilibrium in an imperfect competition market that shows the situation where two or more competitors of a same good can choose how much of that good to produce and at what price charge it in order to obtain the maximun benefit as possible in the case that all the competitors are familiar with the other competitors' strategies and results but do not know what strategy every competitor might choose.

To continue, in the case presented above, the nash equilibrium for each firm is to charge low price due to the fact that if one company charges high price and the other decides to charge low price then the first company will lose a big amount of money instead of the case where both charges low price.