Table 11-5 Table 11-5 Shows the Payoff Matrix for Wal-Mart

question 180

Multiple Choice

Table 11-5 Table 11-5 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3.At the start of the game each firm charges a low price and each earns a profit of $7,000.
-Refer to Table 11-5.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:

Marginal Revenue Curve

A graph that shows the additional revenue a firm earns from selling one more unit of a good or service.

Upward Sloping

A characteristic of a graph or curve that rises from left to right, indicating a positive relationship between two variables.

Perfectly Competitive Firm

A business operating in a market where no single firm can influence the market price or market conditions, facing many competitors and selling identical products.

Long Run

A period sufficient for all inputs to production, including capital, to be varied.