In a duopoly game,we observe the following payouts.If the two firms collude they each make an economic profit of $50,000.If one firm cheats,then that firm makes an economic profit of $60,000 and the other incurs an economics loss of $10,000.If both firms cheat,then they both make zero economic profit.What is the Nash equilibrium?
A)Both firms cheat.
B)Neither firm cheats.
C)One firm cheats but we don't know which one.
D)Only the larger firm cheats.
E)Only the smaller firm cheats.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, if one firm cheats while the other doesn't, the cheating firm gains more ($60,000) compared to colluding ($50,000). However, knowing this, both firms are incentivized to cheat to avoid the loss incurred when the other cheats, leading to both making zero economic profit. This outcome, where both firms cheat, is stable since neither can unilaterally improve their payoff by changing their strategy, making it the Nash equilibrium.

In a Duopoly Game,we Observe the Following Payouts