Question

1. Predatory pricing occurs when a firm?

2.

A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called

	a.	a socially-optimal solution.
	b.	a Nash equilibrium.
	c.	a competitive equilibrium.
	d.	an open-market solution.

3.

This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B).

		B
		Left	Right
A	Up	(4, 4)	(6, 2)
	Down	(2, 6)	(0, 0)

Refer to Table 17-14. Which outcome is the Nash equilibrium in this game?

1. A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called

   	a.	a socially-optimal solution.
   	b.	a Nash equilibrium.
   	c.	a competitive equilibrium.
   	d.	an open-market solution.

Answer 1

1. Predatory pricing occurs when a firm sells its goods or services at a price below cost with an intention of forcing rival firms out of business.

2. b) a Nash equilibrium.

Nash equilibrium is a strategy profile such that for each player given strategy, it is best response. Nash equilibrium is a set of strategies such that each player is doing their best given the strategy of other player.

3. If A chooses Up then best response of B is to choose Left because it gives higher payoff of $ 4 to B.

If B chooses Left then best response of A is to choose Up because of higher payoff to A.

So, (Up; Left) is the Nash Equilibrium.