Question

Bud and Wise are the only two producers of aniseed beer, a New Age product designed to displace root beer. Bud and Wise are trying to figure out how much of this new beer to produce. They know:

If they both limit production to 10,000 gallons a day, they will make the maximum attainable joint profit of $200,000 a day-$100,000 a day each.

If either firm produces 20,000 gallons a day while the other produces 10,000 a day, the one that produces 20,000 gallons will make an economic profit of $150,000 and the other one will incur an economic loss of $50,000.

If both increase production to 20,000 gallons a day, each firm will make zero economic profit.

Construct a payoff matrix for the game that Bud and Wise must play.

Find the Nash equilibrium of the game that Bud and Wise play.

Answer 1

The payoff matrix will be as follows;

The Nash equilibrium is both producers produce 20,000 gallons and both make zero profits