In the game shown below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{l}
\quad\quad\quad\quad\quad\text { Firm Two }\
\text { Firm One }
\begin{array}{|l|l|l|}
\hline & \text { High Price } & \text { Low Price } \
\hline \text { High Price } & (10,10) & (5,-5) \
\hline \text { Low Price } & (5,-5) & (0,0) \
\hline
\end{array}\end{array}$ Which of the following are Nash equilibrium payoffs in the one-shot game?
A) (0, 0)
B) (5, -5)
C) (-5, 5)
D) (10, 10)

Question

Quizplus · Accepted Answer

A Nash equilibrium occurs when each player’s strategy is a best response to the other player’s strategy. Firm one will not deviate from charging a high price given that if it charges a low price, firm two charging a high price gives firm one a payoff of 5 whereas firm one charging a low price gives firm one a payoff of 0. Firm two will not deviate from charging a high price given that if it charges a low price, firm one charging a high price gives firm two a payoff of 5 whereas firm one charging a low price gives firm two a payoff of -5. Thus, (10,10) is a Nash equilibrium payoff.

In the Game Shown Below,firms 1 and 2 Must Independently