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Consider the payoff matrix below, which shows the pricing strategies of two competing firms
Consider the payoff matrix below, which shows the pricing strategies of two competing firms. Firm B Price high Price low $150 $100 Price high $100 Firm A -$50 -$50 $0 Price low $150 SO The highest total profit occurs when: O Firm A prices low and Firm B prices high. O both firms price high both firms price low. O Firm A prices high and Firm B prices low. The dominant strategy for Firm A is to (Click to select) The dominant strategy for Firm B is to (Click to select) If both firms play their dominant strategies, Firm A will earn $ and Firm B will earn $
Expert Solution
Dominant strategy for a player is the best response function given the responses of rival players. It gives the maximum pay off irrespective of what the rival does.
1) highest total profit occurs when both players charge a high price. This profit is 100 + 100 = $200. Both forms price high is correct
2) dominant strategy for A is to charge a low price because the profit is maximum for both strategies selected by B
3) dominant strategy for B is to charge a low price
4) when they play dominant strategy, A will earn $0 and B will earn $0.
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