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 both Joe and Sam, ______ is a ______.
A)cutting the price to $2.90; dominated strategy
B)leaving the price at $3; Nash equilibrium
C)leaving the price at $3; dominant strategy
D)cutting the price to $2.90; dominant 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 both Joe and Sam, ______ is a ______.
A)cutting the price to $2.90; dominated strategy 
B)leaving the price at $3; Nash equilibrium 
C)leaving the price at $3; dominant strategy 
D)cutting the price to $2.90; dominant strategy

Quizplus · Accepted Answer

D is the dominant strategy for both Joe and Sam because no matter what the other person chooses, reducing the price to $2.90 always leads to a higher profit than keeping the price at $3. This is evident in the payoff matrix as well. Therefore, both should cut their price to $2.90.

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