Question

In an auction scenario, two firms are bidding for a contract. Firm A's possible bid is represented by

$6,000, and Firm B's possible bid is either $6,000 or $14,000. Considering the Nash equilibrium concept, which of the following statements accurately describes the situation?
A) There is no Nash equilibrium in this scenario.
B) There is one Nash equilibrium - for both firms to bid $6,000.
C) There are two Nash equilibria - for both firms to bid $14,000 and for both firms to bid $6,000.
D) The Nash equilibrium can only be determined if additional information about the cost structure is provided.

Answer 1

In the auction scenario, there is one Nash equilibrium - for both firms to bid $6,000. This is the strategy that maximizes the profit for both firms.

Step-by-step explanation:

The correct statement that accurately describes the scenario in the auction is B) There is one Nash equilibrium - for both firms to bid $6,000.

In a Nash equilibrium, neither player has an incentive to change their strategy given their opponents' strategy. In this case, if Firm A bids $6,000, it maximizes its profit regardless of Firm B's bid. If Firm B bids $6,000, it also maximizes its profit. Therefore, both firms have a dominant strategy of bidding $6,000, which is the Nash equilibrium.

This scenario assumes that the firms are purely self-interested and do not trust each other. It does not consider possible cooperative strategies or trust.