Bank-With-Us and First-Bank Are the Only Two Banks in GreenVillage,and

question 108

Multiple Choice

Bank-with-us and First-Bank are the only two banks in GreenVillage,and they are trying to increase their profits by attracting more customers.Consumers are indifferent between banks;they are interested only in the interest rate they can earn on their savings.Assume that each bank can choose to offer a 2% or a 5% interest rate on savings.If both banks are offering 2% interest rate,they split the market and each earns $1.6 billion in profits.If both banks are offering 5% interest rate,they split the market and each earns $1.2 billion in profits.If one offers 2% and the other one offers 5%,the bank offering the higher interest rate earns $2 billion in profits,and the other bank earns only $1 billion.What is the dominant strategy equilibrium?

• A) Both banks offer 2% interest rate to maximize profits
• B) Both banks offer 5% interest rate
• C) Bank-with-us offers 2% no matter what the other bank does
• D) Bank-with-us offers 2% and First-Bank offers 5%
• E) Bank-with-us offers 5% and First-Bank offers 2%

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