The following matrix shows the pricing strategies and resultant profits (in thousands of dollars) for two profit-maximizing firms.
Table 9-1
$\begin{array} {c}
\quad\quad \text { Firm B} \
\begin{array}{ | c | c | c | }
\hline \text { Firm } \mathrm { A } & \text { High } & \text { Low } \
\hline \text { High price } & 35,35 & 21,41 \
\hline \text { Low price } & 37,21 & 30,30 \
\hline
\end{array}
\end{array}$
-Refer to Table 9-1. If both the firms act noncooperatively, which of the following is most likely?
A) Firm B will set a high price.
B) Both Firm A and Firm B will earn profit equal to $35,000.
C) Both Firm A and Firm B will set a low price.
D) Firm A will set a high price.
E) Firm A's profit will be equal to $37,000.

Question

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars) for two profit-maximizing firms.
Table 9-1
 $\begin{array} {c}
\quad\quad \text { Firm B}  \
\begin{array}{ | c | c | c | } 
\hline \text { Firm } \mathrm { A } & \text { High } & \text { Low } \
\hline \text { High price } & 35,35 & 21,41 \
\hline \text { Low price } & 37,21 & 30,30 \
\hline
\end{array} 
\end{array}$
-Refer to Table 9-1. If both the firms act noncooperatively, which of the following is most likely?
A) Firm B will set a high price.
B) Both Firm A and Firm B will earn profit equal to $35,000.
C) Both Firm A and Firm B will set a low price.
D) Firm A will set a high price.
E) Firm A's profit will be equal to $37,000.

Quizplus · Accepted Answer

In a noncooperative setting, each firm aims to maximize its own profit without collaborating with the other. Given the matrix, if either firm believes the other will set a high price, it has an incentive to set a low price to increase its profit (37 for A if B sets high, 41 for B if A sets high). Conversely, if one expects the other to set a low price, setting a low price still yields a better or equal outcome (30 for both if both set low) than the alternative (21 for A if it sets high, B sets low; 21 for B if it sets high, A sets low). Thus, rational choice leads both to set low prices, resulting in a profit of $30,000 each, aligning with the Nash Equilibrium concept.

The Following Matrix Shows the Pricing Strategies and Resultant Profits