Refer to the figure below. If both firms offer reduced rates, each earns ______, and if both firms keep their rates high, each earns ______.
A)300; 50
B)50; 300
C)300; 500
D)500; 300

Question

Refer to the figure below.  If both firms offer reduced rates, each earns ______, and if both firms keep their rates high, each earns ______.
A)300; 50 
B)50; 300 
C)300; 500 
D)500; 300

Quizplus · Accepted Answer

In the prisoner's dilemma game, both firms have a dominant strategy to keep their rates high as it leads to a better outcome for them individually regardless of their opponent's choice. Hence, if both firms keep their rates high, they can earn $300 each. However, if both firms choose to reduce their rates, they can earn $50 each, which is still better than the situation where one firm reduces the rate while the other keeps it high and earns $500 and $0, respectively. Therefore, the best choice for both firms is to reduce their rates, resulting in a Nash equilibrium.

Refer to the Figure Below