Question

Suppose that McDonalds and Yum Brands are the sole producers of a quadruple-decker chicken and hamburger sandwich. The two firms currently charge the same price for their products. If neither firm reduces the price of its quadruple-decker chicken and hamburger sandwich, each firm earns $40 million in profit. If both firms reduce their prices, then each firm will earn $9 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $70 million while the other firm will earn a profit of $2 million.

Assuming that collusion is not a possibility, the Nash equilibrium occurs when

Answer 1

Both companies will reduce their prices.

Step-by-step explanation:

Given that collusion is not possible between McDonald's and Yum, both companies will try to earn more money by reducing their prices and increasing their profits to $70 million. They will do this hoping that the other firm doesn't modify its pricing strategy.