Use the following to answer question:
-(Table: Two Rival Gas Stations)Use Table: Two Rival Gas Stations.The table shows a payoff matrix for two gas stations in a small town.Each firm can set either a high price or a low price,and customers view these two firms as nearly perfect substitutes.Profits in each cell of the payoff matrix are given as (Swifty's profit,Speedy's profit).If each firm sets the price independently,the Nash equilibrium outcome will be:
A)$100,$100.
B)$150,$25.
C)$25,$150.
D)$50,$50.

Question

Use the following to answer question: 
-(Table: Two Rival Gas Stations)Use Table: Two Rival Gas Stations.The table shows a payoff matrix for two gas stations in a small town.Each firm can set either a high price or a low price,and customers view these two firms as nearly perfect substitutes.Profits in each cell of the payoff matrix are given as (Swifty's profit,Speedy's profit).If each firm sets the price independently,the Nash equilibrium outcome will be:
A)$100,$100. 
B)$150,$25. 
C)$25,$150. 
D)$50,$50.

Quizplus · Accepted Answer

The Nash equilibrium is reached when both firms choose the dominant strategy, which in this case is to set a low price. If both firms set a high price, they both earn a profit of $25. However, if both firms set a low price, they both earn a profit of $50. Therefore, (Swifty's profit,Speedy's profit) will be (50,50) at the Nash equilibrium.

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