Question

1. Using the payoff matrix below, answer the following questions:

1. What is the Nash equilibrium for this game? Is this the optimal outcome for both players?
2. Assume Greg and Oleg agree to set high prices. Will such an agreement be kept? Why or why not?
3. If Greg announces that he will match Oleg's prices no matter what, what do you expect the outcome to be?

		Oleg's Fruit Company
		Low Price	High Price
Greg's Apples	Low Price	Greg= 300 Oleg = 300	Greg=1,750 Oleg = 200
	High Price	Greg= 200 Oleg= 1,750	Greg= 1,300 Oleg = 1,300

Answer 1

i)Given oleg move low price, best move for greg is to charge low price,

Given oleg move high price , best move for greg is to charge low price.

So low price is dominant strategy for greg.

By using same reasoing, oleg has also a dominant strategy of low price.

So nash Equilibrium will at when both choose their respective dominant strategy . So nash Equilibrium strategy set:( low,low) and outcome:(300,300)

No, it is kot Optimal outcome for both.The Optimal outcome will be that MAXIMIZE their payoff.

B)Not, given oleg price high, there is an incentive for greg to charge low and increase payoff to 1750.

So each one has an incentive to deviate from their actions ,so it is not sustainable.

C) Knowing that greg greg match his peice, oleg know ,if he will set low,greg will set low and his Profit will be 300.

If he set high ,then greg will set high and his Profit will be 1300.

So oleg will set high price , and greg will match his price by charging high price and outcome will be,both earning 1300