Firm B Keep agreement Break agreement Keep agreement Firm A profit = $50 Firm B

Question

Firm B

Keep agreement

Break agreement

Keep agreement

Firm A profit = $50
Firm B profit = $50

Firm A profit = $100
Firm B profit = $5

Break agreement

Firm A profit = $5
Firm B profit = $100

Firm A profit = $10
Firm B profit = $10

Given the matrix above, which of the following is correct?

Firm B

Keep agreement

Break agreement

Keep agreement

Firm A profit = $50
Firm B profit = $50

Firm A profit = $100
Firm B profit = $5

Break agreement

Firm A profit = $5
Firm B profit = $100

Firm A profit = $10
Firm B profit = $10

Explanation / Answer

When A chooses Keep, B will choose Keep

When A chooses Break, B will choose Keep

So, B’s dominant strategy is to Keep Agreement.

Similarly,

When B chooses Keep, A will choose Keep

When B chooses Break, A will choose Keep

So, A’s dominant strategy is to Keep Agreement

Thus, correct option is: (d) Firm A’s dominant strategy is to keep the agreement, and Firm B’s dominant strategy is to keep the agreement

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