a)
To calculate: The profit earned by a firm when they market a new product and the competitor does not.
a)
Answer to Problem 1FRQ
Profit earned is $400.
Explanation of Solution
As per the table, if the firm markets the product and the competitor do not market the product, then the profit would be $400. That is the profit the competitor would have earned had it been marketing the product.
Since the competitor is not marketing the product, that profit will get transferred to the other firm. As that firm will have the potential to attract most of the customers of the market.
Introduction:
As per the
Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.
b)
To explain: The competitor’s strategy when your firm is marketing the product.
b)
Explanation of Solution
The competitor should also market the new product. If the competitor wants to survive in that market and wants to grab the attention of the customers and want to increase its profits, then the competitor should also market the new product.
Introduction:
As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.
Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.
c)
To state: whether the firm has a dominant strategy, along with an explanation.
c)
Explanation of Solution
Yes, the firm has a dominant strategy. Since, the profits are greater in case the firm markets the new product i.e either $100 or $400 versus $0, irrespective of what the competitor does.
That means the firm’s profits are greater than that of the competitor irrespective of whether the competitor markets the new product or not.
Introduction:
As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.
Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.
d)
To state: whether this situation has a Nash equilibrium along with an explanation.
d)
Explanation of Solution
Yes, there is Nash equilibrium. As both, players are marketing the new product and no side is willing to not to market the product. Both players are marketing it irrespective of the fact of what the other player is doing. So, this is Nash equilibrium.
Moreover, in this case, both the players want to market the product irrespective of what the other is doing, so it is Nash equilibrium as well as dominant strategy equilibrium.
Introduction:
As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.
Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.
Chapter 65 Solutions
Krugman's Economics For The Ap® Course
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education