Question

C. Both firms offer extended warranties OD. Neither firm offers extended warranties. A dominant strategy O A. never results in the highest profits for both firms. B. always yields the unique best action for the decision maker no matter what action the other firms undertake O C. cannot be evaluated. OD. always results in the highest profits for both firms. Click to select your answer o DIE

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Answer 1

Answer:

B. a dominant strategy always yields the unique best action for the decision maker no matter what the action of other firms undertake.

reason: A firm is said to have a dominant strategy if it tends to choose the same strategy for any move of the other firms. It does not matter what the other firms choose to do. However, the equiibrium may not exhibit the highest payoff possible for a player given in the payoff table (hence option (D) is ruled out). This can be demonstrated with the following matrix:

Player 2 Don't coop Player 1 Don't coop: 120,90 Coop 150, 60 Coop 300, 80 350, 40

Player 1's dominant strategy is to cooperate no atter what Player 2 will choose to do. Similarly, Player 2's dominant strategy is 'Don't cooperate', no matter what Player 1 may choose to do. Hence (Cooperate, Don't cooperate) is the equilibrium outcome with payoffs (150 60), which is not the best payoff for either player.