The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B.
-If firm A's competitor advertises to increase sales and the best action is also for firm A to advertise,then
A) a Nash equilibrium results.
B) a cartel equilibrium results.
C) a cooperative equilibrium results.
D) a non-cooperative equilibrium results.
E) a duopoly equilibrium results.

Question

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. 
-If firm A's competitor advertises to increase sales and the best action is also for firm A to advertise,then
A) a Nash equilibrium results. 
B) a cartel equilibrium results. 
C) a cooperative equilibrium results. 
D) a non-cooperative equilibrium results. 
E) a duopoly equilibrium results.

Quizplus · Accepted Answer

A Nash equilibrium occurs when both firms choose the best strategy given their competitor's strategy. In this case, if the competitor advertises (strategy A), the best action for firm A is also to advertise (gaining 1 unit of profit as opposed to not advertising and gaining 0 units of profit). This creates a Nash equilibrium where both firms advertise, as neither has an incentive to deviate from this strategy.

The Payoff Matrix Below Shows the Extra Profit Firms X