Suppose There Are Only Two Firms in an Industry

question 79

Multiple Choice

Suppose there are only two firms in an industry. If they each set a high price, they each earn $5000. If they each set a low price, they each earn $2500. If one firm sets a low price while the other sets a high price, the low- price firm earns $7000 while the high- price firm earns $1000. Does a prisoners' dilemma exist?

• A) no, the Nash equilibrium does not maximize the individual payoff
• B) it cannot be determined from the information provided
• C) no, the Nash equilibrium does not maximize the joint payoff
• D) yes, the Nash equilibrium does not maximize the joint payoff
• E) yes, because there is always a prisoner's dilemma in game theory

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