Scenario: Two firms in a market must choose between two alternative strategies: X and Y. The figure below shows the game tree that these firms can use to make their decisions.

-Refer to the scenario above.Which of the following is true?
A) Firm 2 should follow Strategy X if Firm 1 follows Strategy X.
B) Firm 2 should follow Strategy Y if Firm 1 follows Strategy Y.
C) Firm 2 should follow Strategy X if Firm 1 follows Strategy Y.
D) Firm 1 should always follow Strategy X.

Question

Scenario: Two firms in a market must choose between two alternative strategies: X and Y. The figure below shows the game tree that these firms can use to make their decisions.
 
-Refer to the scenario above.Which of the following is true?
A) Firm 2 should follow Strategy X if Firm 1 follows Strategy X. 
B) Firm 2 should follow Strategy Y if Firm 1 follows Strategy Y. 
C) Firm 2 should follow Strategy X if Firm 1 follows Strategy Y. 
D) Firm 1 should always follow Strategy X.

Quizplus · Accepted Answer

Firm 2 should follow Strategy X if Firm 1 follows Strategy Y because this would give Firm 2 a payoff of 8, which is higher than the payoff of 6 that they would receive if they followed Strategy Y. It is not clear which strategy Firm 2 should follow if Firm 1 follows Strategy X, as both Strategy X and Strategy Y would result in a payoff of 6 for Firm 2. Firm 1's decision depends on what they anticipate Firm 2 will do, as their payoff varies based on the combination of strategies chosen.

Scenario: Two Firms in a Market Must Choose Between Two