Question

QUESTION 15 Consider the following simultaneous-move game: Two firms, Firm 1 (raw player) and Firm 2 (column player), decide whether to enter (E) or not enter (N) some market. If neither enters, then both make 0. If both enter, the market is oversaturated and so both earn a loss of 5. However, if only one enters, then the entrant earns monopoly profit of 10. Which of the following matrices is the correct representation of the static game? 0.10 10.0 0.0 О Е N -5.-5 0,10 10,0 0.0 N ON E 5,5 0,10 10,0 0,0

Answer 1

If neither enters, both make 0.

Hence at (N,N) the payoff should be (0,0).

The first N is for Firm 1, second for Firm 2.

If both enter, both earn a loss of 5.

At (E,E) the payoff should be (-5,-5).

If only one enters, entrant gets 10.

So when Firm 1 enters and Firm 2 doesn't, the payoff for (E,N) is (10,0).

When Firm 2 enters and Firm 1 doesn't, the payoff for (N,E) is (0,10).

The correct option is therefore, the first option.