What is Nash equilibrium ### Understanding Nash Equilibrium in a Competitive Market#### Scenario:Consider a market with two firms, Target and Wal-Mart, that sell CDs in their music department. Both Target and Wal-Mart must choose whether to charge a high price ($25) or a low price ($15) for the new Miley Cyrus CD.These price strategies with corresponding profits are depicted in the payoff matrix to the right. Target's payoffs are in red, and Wal-Mart's are in blue.#### Analysis:- **Target's Dominant Strategy:** Target's dominant strategy is to pick a price of **$15**.- **Wal-Mart's Dominant Strategy:** Wal-Mart's dominant strategy is to pick a price of **$15**.#### Question:What is the Nash equilibrium for this game?#### Answer Choices:- **A.** The Nash equilibrium is for Target to choose a price of $15 and Wal-Mart to choose a price of $25.- **B.** The Nash equilibrium is for Target to choose a price of $25 and Wal-Mart to choose a price of $15.- **C.** A Nash equilibrium does not exist for this game.- **D.** The Nash equilibrium is for Target and Wal-Mart to both choose a price of $15.- **E.** The Nash equilibrium is for Target and Wal-Mart to both choose a price of $25.Click to select your answer and then click Check Answer.---*Note:* In game theory, a Nash equilibrium occurs when each player's strategy is optimal, given the other player's strategy. Here, both Target and Wal-Mart find it optimal to pick a price of $15, making choice **D** the Nash equilibrium. This image presents a payoff matrix for pricing strategies between Target and Walmart. ### Payoff Matrix Explanation:The matrix is a 2x2 grid where each cell represents the profits for Target and Walmart under different pricing scenarios. - **Rows** represent Walmart's pricing strategy: * Top row: Price = $25 * Bottom row: Price = $15- **Columns** represent Target's pricing strategy: * Left column: Price = $25 * Right column: Price = $15### Payoff Values:- Each cell contains two payoff values: * The first value represents the profit for Target. * The second value represents the profit for Walmart.### Breakdown:1. **Target Price = $25, Walmart Price = $25**: * Both set their prices at $25. * Profit for Target: $6,000 * Profit for Walmart: $6,0002. **Target Price = $15, Walmart Price = $25**: * Target reduces its price to $15 while Walmart keeps it at $25. * Profit for Target: $12,000 * Profit for Walmart: $1,0003. **Target Price = $25, Walmart Price = $15**: * Target keeps its price at $25 while Walmart reduces it to $15. * Profit for Target: $1,000 * Profit for Walmart: $12,0004. **Target Price = $15, Walmart Price = $15**: * Both set their prices at $15. * Profit for Target: $3,000 * Profit for Walmart: $3,000### Conclusion:This matrix provides insight into competitive pricing strategies, illustrating how changes in pricing can impact profits for both retailers. The strategic decision-making process can be analyzed, showcasing the interdependence of each company's actions on the other’s financial outcomes.

To find the nash equilibrium we will look into the table: Wal-Mart's profit is shown in blue and…

onsider a market with twO Tirms, Target and Wal-Mart, that sell CDS In their music department. Both ust choose whether to charge a high price ($25) or a low price ($15) for the new Miley Cyrus CD. hese price strategies with corresponding profits are depicted in the payoff matrix to the right. Target' re in red and Wal-Mart's are in blue. arget's dominant strategy is to pick a price of $ 15.

onsider a market with twO Tirms, Target and Wal-Mart, that sell CDS In their music department. Both ust choose whether to charge a high price ($25) or a low price ($15) for the new Miley Cyrus CD. hese price strategies with corresponding profits are depicted in the payoff matrix to the right. Target' re in red and Wal-Mart's are in blue. arget's dominant strategy is to pick a price of $ 15.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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