📚 Learning Guide
Nash Equilibrium and Strategy Adjustments
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In a scenario where Gary's Gym and eFitness reach a Nash equilibrium, which of the following best explains why neither firm would want to change their strategy?

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Choose the Best Answer

A

Both firms are maximizing their payoffs given the other firm's strategy.

B

Changing strategies would always lead to higher payoffs for both firms.

C

One firm has complete control over the market, eliminating competition.

D

The Nash equilibrium is always the most profitable outcome for both firms.

Understanding the Answer

Let's break down why this is correct

Answer

In a Nash equilibrium, both Gary's Gym and eFitness have chosen their best strategies given what the other firm is doing. This means that neither gym can improve its situation by changing its strategy alone. For example, if Gary's Gym offers a lower price for memberships and eFitness matches that price, both gyms find themselves in a stable position where neither can attract more customers by changing their prices. If either gym tried to change its strategy, like raising prices, it could lose customers to the other gym, which would not be beneficial. Therefore, in this situation, both gyms stick to their strategies because any change would likely lead to a worse outcome for them.

Detailed Explanation

Both gyms are making the best choices they can, given what the other gym is doing. Other options are incorrect because This idea suggests that changing would always help both gyms; This option implies one gym controls everything, which isn't true in a Nash equilibrium.

Key Concepts

Nash Equilibrium
Strategic Interaction in Oligopoly
Payoff Analysis
Topic

Nash Equilibrium and Strategy Adjustments

Difficulty

medium level question

Cognitive Level

understand

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