Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. In this situation, the Nash equilibrium yields a:
A)lower payoff than each would receive if each played his dominant strategy.
B)higher payoff than each would receive if each played his dominant strategy.
C)lower payoff than each would receive if each played his dominated strategy.
D)the same payoff that each would receive if each played his dominated strategy.

Question

Quizplus · Accepted Answer

In the Nash equilibrium of this game, both players cut the price to $2.90 (the dominant strategy), and each earns $900. If both keep the price at $3 (the dominated strategy), then they each earn $1,000.

Joe Is the Owner of the 7-11 Mini Mart, Sam