Chapter 65, Problem 1FRQ

a)

To determine

To calculate: The profit earned by a firm when they market a new product and the competitor does not.

Answer to Problem 1FRQ

Profit earned is $400.

Explanation of Solution

As per the table, if the firm markets the product and the competitor do not market the product, then the profit would be $400. That is the profit the competitor would have earned had it been marketing the product.

Since the competitor is not marketing the product, that profit will get transferred to the other firm. As that firm will have the potential to attract most of the customers of the market.

Economics Concept Introduction

Introduction:

As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.

Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.

b)

To determine

To explain: The competitor’s strategy when your firm is marketing the product.

Explanation of Solution

The competitor should also market the new product. If the competitor wants to survive in that market and wants to grab the attention of the customers and want to increase its profits, then the competitor should also market the new product.

Economics Concept Introduction

Introduction:

As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.

Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.

c)

To determine

To state: whether the firm has a dominant strategy, along with an explanation.

Explanation of Solution

Yes, the firm has a dominant strategy. Since, the profits are greater in case the firm markets the new product i.e either $100 or $400 versus $0, irrespective of what the competitor does.

That means the firm’s profits are greater than that of the competitor irrespective of whether the competitor markets the new product or not.

Economics Concept Introduction

Introduction:

As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.

Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.

d)

To determine

To state: whether this situation has a Nash equilibrium along with an explanation.

Explanation of Solution

Yes, there is Nash equilibrium. As both, players are marketing the new product and no side is willing to not to market the product. Both players are marketing it irrespective of the fact of what the other player is doing. So, this is Nash equilibrium.

Moreover, in this case, both the players want to market the product irrespective of what the other is doing, so it is Nash equilibrium as well as dominant strategy equilibrium.

Economics Concept Introduction

Introduction:

As per the game theory, a dominant strategy is regarded as the best move for an individual irrespective of the way the other players act.

Secondly, a Nash equilibrium is defined as the ideal state of the game wherein both players make the best moves regardless of the moves of their challenger/competitor/opponent.