Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Both firms choose to advertise, resulting in a stable profit for each, with no incentive to change.
B
One firm advertises while the other does not, leading to higher profits for the advertiser.
C
Both firms decide not to advertise, but one firm later changes its strategy to increase profits.
D
Both firms continuously change their strategies to outdo each other, resulting in fluctuating profits.
Understanding the Answer
Let's break down why this is correct
Answer
In a duopoly, two firms compete in the market and make decisions at the same time without knowing what the other will choose. A Nash Equilibrium occurs when both firms choose strategies that are optimal for themselves, given the strategy of the other firm. For example, imagine two coffee shops deciding whether to set high or low prices. If both shops choose to set low prices and neither can increase their profits by changing to a high price, they have reached a Nash Equilibrium. In this situation, both firms are making the best choice they can, considering the choice of the other, leading to a stable outcome where neither has an incentive to change their strategy.
Detailed Explanation
In this situation, both firms advertising means they are happy with their profits. Other options are incorrect because This option suggests that one firm can always do better by advertising alone; Here, one firm changes its strategy after both decide not to advertise.
Key Concepts
Nash Equilibrium
Strategic Interaction
Oligopoly
Topic
Nash Equilibrium in Game Theory
Difficulty
medium level question
Cognitive Level
understand
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