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. You may find it easier to answer the following questions if you fill in the payoff matrix below. For Sam, cutting his price to $2.90 per gallon is a:
A)revenue-maximizing strategy.
B)dominant strategy.
C)dominated strategy.
D)profit-maximizing strategy.

Question

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. You may find it easier to answer the following questions if you fill in the payoff matrix below.  For Sam, cutting his price to $2.90 per gallon is a:
A)revenue-maximizing strategy. 
B)dominant strategy. 
C)dominated strategy. 
D)profit-maximizing strategy.

Quizplus · Accepted Answer

Sam's best strategy is a dominant strategy, which is to cut his price to $2.90 per gallon regardless of Joe's decision. This is because, regardless of what Joe does, Sam will earn a higher profit by cutting his price. Cutting the price to $2.90 brings him a higher profit ($1,350) if Joe keeps his price at $3, and it also brings him a higher profit ($900) if Joe also cuts his price to $2.90. Therefore, Sam's best strategy is to always cut his price to $2.90, making it a dominant strategy.

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