Answer to Question #213741 in Macroeconomics for Anonymous

Question

(b) Two firms are in the candy market. Each firm can choose to go for the high end of the market (high quality) or low end (low quality). Resulting profits are given by the following payoff matrix :

Firm 2.

Low High

Low -20,-30 900,600

Firm 1

High 100,80 50,50

(i) Does any firm have a dominant strategy? Explain.

(ii) Find the pure strategy Nash equlibria (if any).

Answer 1

i) No. This is because equilibrium is unstable as neither party has a motive to change.

ii) There is no pure strategy Nash equlibria