Consider the Following Game in Which Two Firms Decide How

question 77

Multiple Choice

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs:

What is the Nash equilibrium for this game?

• A) Both firms producer low levels of output
• B) Both firms produce high levels of output
• C) Firm A produces low levels of output, and Firm B produces high output.
• D) Firm A produces high levels of output, and Firm B produces low output.
• E) There is more than one Nash equilibrium for this game

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Definitions:

Market Price

The amount of money a buyer is willing to pay for a good or service in a competitive marketplace.

Dividends

Payments made by a corporation to its shareholders, usually as a distribution of profits.

Common Stock

A type of equity ownership in a corporation, representing a claim on part of the company's profits and assets.

Price-Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings, indicating the dollar amount investors will pay for $1 of earnings.