Question

Figure: Payoff Matrix Il for Blue Spring and Purple Rain High price Blue $50,000 Blue Spring Purple Rain High price Low price Purple Rain's Purple Rain's profit = profit = Blue $20,000 Spring's Spring's profit = profit = $20,000 -$2,000 Purple Rain's Purple Rain's profit = profit = $10,000 Blue Spring's Spring's profit profit $50,000 $10,000 Low Blue $2,000 price (Figure: Payoff Matrix Il for Blue Spring and Purple Rain) Use Figure: Payoff Matrix Il for Blue Spring and Purple Rain. The figure describes two producers of bottled water. If both firms follow a tit-for-tat strategy, then: Select one: a. both firms will charge a low price. b. both firms will charge a high price. c. Purple Rain will charge a high price, and Blue Spring will charge a low price. d. Blue Spring will charge a high price, and Purple Rain will charge a low price.

Answer 1

If Blue Spring charges High Price, Purple Rain would choose to opt low price because it gives maximum price of 50,000 among 20,000 / 50,000

If Blue Spring charges Low Price, Purple Rain would choose to opt low price because it gives maximum price of 10,000 among -2,000 / 10,000

Thus, Purple Rain have dominant strategy of choosing low against Blue Spring.

If Purple Spring charges High Price, Blue Rain would choose to opt low price because it gives maximum price of 50,000 among 20,000 / 50,000

If Purple Spring charges Low Price, Blue Rain would choose to opt low price because it gives maximum price of 10,000 among -2,000 / 10,000

Thus, Blue Rain have dominant strategy of choosing low against Purple Spring.

As both players have dominant strategy by choosing Low Price, it is a Nash equilibrium.

Option B is correct.