Two restaurants, in a small town, compete in the market for pizza. Each restaurant must decide whether to advertise or not. The potential monthly profits for these firms are shown below (in thousands of dollars).
FIGURE 10-5

-Referring to Figure 10-5, what is the Nash equilibrium?

Question

Two restaurants, in a small town, compete in the market for pizza. Each restaurant must decide whether to advertise or not. The potential monthly profits for these firms are shown below (in thousands of dollars).
FIGURE 10-5
 
-Referring to Figure 10-5, what is the Nash equilibrium?

Quizplus · Accepted Answer

Nash equilibrium is a point where neither player has an incentive to change their strategy given the other player's strategy. In this case, the Nash equilibrium is when both restaurants advertise, as it maximizes their profits. If Restaurant A advertises and Restaurant B doesn't, Restaurant A profits $30, but if both advertise, Restaurant A profits $20. Similarly, if Restaurant B advertises and Restaurant A doesn't, Restaurant B profits $20, but if both advertise, Restaurant B profits $30. Therefore, the Nash equilibrium is when both restaurants advertise.

Two Restaurants, in a Small Town, Compete in the Market