📚 Learning Guide
Nash Equilibrium Explained
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In a market with two competing firms, if both firms are at a Nash Equilibrium, which of the following statements is most accurate?

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Choose the Best Answer

A

One firm can improve its profit by changing its strategy alone.

B

Both firms are maximizing their profits given the strategy of the other.

C

The firms will continuously change their strategies until they reach maximum profit.

D

Nash Equilibrium implies both firms will always cooperate fully.

Understanding the Answer

Let's break down why this is correct

Answer

In a market with two competing firms, a Nash Equilibrium occurs when both firms choose their best strategies given the strategy of the other firm. This means that neither firm can improve its outcome by changing its strategy while the other firm keeps its strategy the same. For example, if Firm A and Firm B both decide to set their prices at a certain level, and neither can increase their profit by changing their price without the other also changing theirs, they are in Nash Equilibrium. At this point, both firms are satisfied with their decisions because any change would not benefit them. Therefore, the most accurate statement is that both firms have found a stable strategy where they do not have an incentive to deviate.

Detailed Explanation

At Nash Equilibrium, each firm has chosen the best strategy, given what the other firm is doing. Other options are incorrect because This suggests that one firm can always do better by changing its strategy; This implies that firms will keep changing until they find the best profit.

Key Concepts

Nash Equilibrium
Strategic Decision-Making
Game Theory
Topic

Nash Equilibrium Explained

Difficulty

medium level question

Cognitive Level

understand

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