Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Both firms increase production significantly, leading to a price drop and losses for both.
B
Firm A produces at a level where it maximizes its profit given Firm B's production level, and Firm B does the same.
C
Firm A decides to decrease production to increase prices, while Firm B maintains its production level.
D
Both firms agree to cooperate and set production levels to maximize joint profits.
Understanding the Answer
Let's break down why this is correct
Answer
A Nash Equilibrium occurs when each player in a game makes the best decision they can, considering the choices of the other player. In the case of two firms choosing production levels, a Nash Equilibrium happens when neither firm can increase its profit by changing its production level while the other firm's production level stays the same. For example, if Firm A produces 100 units and Firm B produces 150 units, and both are making maximum profit given the other's output, then this situation is a Nash Equilibrium. If either firm tries to change its production to make more profit, it will actually end up making less, showing that both firms are satisfied with their current choices. This balance is key to understanding how firms compete and make decisions in economics.
Detailed Explanation
In this situation, both firms are making the best choice they can, given what the other firm is doing. Other options are incorrect because This option shows both firms losing money; Here, one firm is changing its production to raise prices, while the other does not.
Key Concepts
Nash Equilibrium
Strategic Decision-Making
Game Theory
Topic
Nash Equilibrium Explained
Difficulty
medium level question
Cognitive Level
understand
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