Table 11-7 Table 11-7 Shows the Payoff Matrix for Walmart

question 345

Multiple Choice

Table 11-7
Table 11-7 shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
-Refer to Table 11-7.Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not,why and what is the Nash equilibrium?

• A) No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000.
• B) No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game.
• C) No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price.
• D) Yes, the current situation is a Nash equilibrium.

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Definitions:

Cost of Debt

The effective interest rate a company pays on its debts, a key component in the calculation of a firm’s cost of capital.

Risk Premium

The excess return required from an investment in a risky asset over a risk-free investment.

Flotation Costs

The costs associated with issuing new securities, including underwriting, legal, registration, and other expenses.

Securities

Investment assets that denote a shareholding in a publicly-listed company (stock), a bondholder’s claim against a corporation or government, or ownership rights as outlined in an option contract.