Chapter 12R, Problem 25MCQ

To determine

The correct option that Nash equilibrium will happen if Company W will offer $30,000 to Company LB to not to build a new store.

Answer to Problem 25MCQ

Option e is correct.

Explanation of Solution

Explanation for correct option:

e.

As per the given information, the Company W will build a store and will earn profit of $100,000 if Company L is not building a new store as shown below:

  

In the given question, Nash equilibrium will not exists as Company is receiving incentive of $5,000 for not building a new store. Therefore, option e is correct.

Explanation for incorrect options:

a.

If both companies will build a new store then both will earn profit of $25,000.. Therefore, option a is incorrect.

b.

In case, Company W only build a new store by offering $30,000 to Company L then Company W will earn $70,000 and Company L will earn $30,000 which is higher for both players. Therefore, option b is also incorrect.

c.

If Company W will not build then in that case, Company L will earn profit of $100,000. Therefore, option c is incorrect.

d.

If both players will not build a new store then neither of the companies will earn profit. Therefore, option d is incorrect.

Economics Concept Introduction

Nash equilibrium: Nash equilibrium refers to the outcome at which both players receive no incentive in changing their previous strategy.