Question

Suppose Firm A must decide whether to charge a low price or a high price without knowing what Firm B will do. In the Nash equilibrium based on this payoff matrix, Firm A will set a _ price based on the analysis of the payoff matrix, which indicates that Firm B will set a _ price.

a. high; high

b. low; low

c. low; high

d. high; low

Answer 1

The student's question pertains to a firm's pricing strategy in Nash equilibrium and the monopolist's challenge in profit maximization. The Nash equilibrium decision cannot be accurately determined from the provided description alone. The effect of a price floor is most significant when it's set substantially above equilibrium, causing a surplus.

Step-by-step explanation:

The student's question concerns the decision-making process of Firm A in a situation where it must choose a pricing strategy without knowing Firm B's actions, and seeks to determine the outcome in a Nash equilibrium scenario. The given information from Figure 9.3 discusses the challenges for a monopolist attempting to maximize profit by choosing either a low price with high quantity sold or a high price with low quantity sold. The perfectly competitive firm's situation differs in that its demand curve is the same as the market demand curve, which is not explicitly addressed in this question.

Monopolist profit maximization involves balancing the price and the quantity sold to maximize revenue. For a price floor to have the largest effect, it must be set substantially above the equilibrium price, as it will create a surplus by preventing the market from clearing.