Firm 2 Develop Product X Develop Product Y Develop Product Z Firm 1 Develop Prod
ID: 1148245 • Letter: F
Question
Firm 2
Develop Product X
Develop Product Y
Develop Product Z
Firm 1
Develop Product A
400 , 200
650 , 400
210 , 240
Develop Product B
370 , 800
200 , 200
700 , 230
Develop Product C
600 , 990
400 , 825
430 , 280
Which of the following outcomes represent(s) a Nash equilibrium?
I. (200 , 200)
II. (600 , 990)
III. (650, 400)
IV. (400 , 825)
Firm 2
Develop Product X
Develop Product Y
Develop Product Z
Firm 1
Develop Product A
400 , 200
650 , 400
210 , 240
Develop Product B
370 , 800
200 , 200
700 , 230
Develop Product C
600 , 990
400 , 825
430 , 280
Which of the following outcomes represent(s) a Nash equilibrium?
I. (200 , 200)
II. (600 , 990)
III. (650, 400)
IV. (400 , 825)
Explanation / Answer
If Firm 1 develops product A the Firm 2 will develop product Y as pay-off for Firm 2 is highest in such case.
If Firm 1 develops product B then Firm 2 will develop product X as pay-off for Firm 2 is highest in such case.
If Firm 1 develops product C then Firm 2 will develop Product X as pay-off for Firm 2 is highest in such case.
It can be seen that Firm 2 will never develop product Z whatever be the strategy adopted by Firm 1.
So, strategy of developing product Z is strictly dominated and will be eliminated.
Now, Firm 2 has two strategies - To develop Product X or to develop the Product Y.
If Firm 2 develops product X then Firm 1 will develop Product C as pay-off for Firm 1 is highest in such case.
If Firm 2 develops product Y then Firm 1 will develop Product A as pay-off for Firm 1 is highest in such case.
So, Nash equilibrium of this game is (600, 990) and (650, 400).
Hence, the correct answer is the option (4).
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