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. The clear outcome of this game is that:
A)Joe will cut his price and Sam won't.
B)both Joe and Sam will cut their price.
C)Sam will cut his price and Joe won't.
D)neither Joe nor Sam will cut his price.

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.  The clear outcome of this game is that:
A)Joe will cut his price and Sam won't. 
B)both Joe and Sam will cut their price. 
C)Sam will cut his price and Joe won't. 
D)neither Joe nor Sam will cut his price.

Quizplus · Accepted Answer

The best choice for both Joe and Sam is to cut their price to $2.90. This results in each of them earning a profit of $900, which is still a decent profit margin. If either Joe or Sam decides not to cut their price, their profit will decrease significantly compared to the other player who cuts their price. Therefore, both players have an incentive to cut their price, resulting in the clear outcome of both players cutting their price.

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