📚 Learning Guide
Nash Equilibrium Explained
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In a market where firms reach a Nash Equilibrium, what is the underlying reason that prevents any firm from changing its strategy unilaterally?

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Choose the Best Answer

A

Each firm has found a strategy that maximizes its profit given the strategies of other firms.

B

There is a government regulation that restricts any changes in strategy.

C

Firms are unaware of the strategies employed by their competitors.

D

All firms are making the same profit regardless of their strategy.

Understanding the Answer

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Answer

In a market where firms reach a Nash Equilibrium, each firm has chosen a strategy that works best for them, given the strategies of the other firms. This means that if one firm decides to change its strategy on its own, it would not improve its situation because the other firms would still stick to their current strategies. For example, imagine two companies that both produce a similar product. If one company tries to lower its prices to attract more customers while the other keeps its prices the same, the first company might end up losing money without gaining enough customers to make up for it. Therefore, the reason firms do not change their strategies is that doing so would not lead to a better outcome for them when considering how others are behaving.

Detailed Explanation

Each firm has chosen the best way to make money based on what others are doing. Other options are incorrect because Some might think rules stop firms from changing; It's a common mistake to think firms don't know what others are doing.

Key Concepts

Nash Equilibrium
Game Theory
Strategic Decision-Making
Topic

Nash Equilibrium Explained

Difficulty

medium level question

Cognitive Level

understand

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