Question

Table 17-7 Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies. Wonka Good Quality Poor Quality Wonka - 10 Wonka - 9 Good Quality Gekko = 10 Gekko - 12 Gekko Wonka = 12 Wonka - 11 Poor Quality Gekko - 9 Gekko = 11 Refer to Table 17-7. Which of the following statements is correct? Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a poor quality product and for the other firm to produce a good quality product Regardless of the strategy pursued by Wonka, Gekko's best strategy is to produce a good quality product, and for that reason producing a good quality product is a dominant strategy for Gekko. The highest possible combined profit for the two firms occurs when both produce a poor quality product, and for that reason producing a poor quality product is a dominant strategy for both firms Wonka can potentially earn its highest possible profit if it produces a good quality product, and for that reason it is a dominant strategy for Wonka to produce a good quality product.

Answer 1

Option B.

In the above pay off matrix, regardless of the strategy pursued by Wonka, Gekko's best strategy is to produce good quality product and for that reason producing a good quality product is the dominant strategy gor Gekko no matter what the other firm is doing. Because payy associated with good quality for Gekko is high in both cases.