rall 2010 ECO 301- Economics or the Fnm 2. Two friends, Tara (T), and Sam (S) ar

Question

rall 2010 ECO 301- Economics or the Fnm 2. Two friends, Tara (T), and Sam (S) are trying to decide what to do on a Saturday night. They each have three strategies, with the payoffs displaying their preferred options as show below. (Payoffs are written with Tara's payoffs first, then Sam's) [5 points] Sam Movie & Pub Crawl Dinner Party Popcorn Pub Crawl 5, 2 2, 2 2,3 Tara Dinner 3,4 4,2 Party2, 1 Movie & Popcorn 1,1 4, 2 3, 2 What will their payoffs be at Nash Equilibrium? a. (5, 2) b. (3, 4) c. (4, 2) d. (5, 3) e. (2, 3)

Explanation / Answer

c. (4,2)

Nash equilibrium is that strategy profile where best response (BR) of both players occur simultaneously given other player's strategy.

- When Tara chooses Pub crawl, Sam's BR is Movie (3)
- When Tara chooses Dinner party, Sam's BR is Dinner party (4)
- When Tara chooses Movie, Sam's BR is both Movie (2) and Dinner party (2)

- When Sam chooses Pub crawl, Tara's BR is Pub Crawl (5)
- When Sam chooses Dinner party, Tara's BR is Movie (4)
- When Sam chooses Movie, Tara's BR is Dinner party (4)

So, BR of both players occur Tara chooses movie (4) and Sam chooses Dinner party (2). So, their payoffs at Nash Equilibrium are (4,2).

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