Question

Consider a market with two​ firms, Krispy Kreme Doughnuts​ (KK) and​ Dunkin' Donuts​ (DD), that produce donuts. Both firms must choose whether to charge a high price ​($1.25​) or a low price ​($0.85​) for their donuts. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. Krispy​ Kreme's profits are in red and​ Dunkin' Donuts' are in blue. Krispy​ Kreme's dominant strategy is to pick a price of $1.25 ​, and​ Dunkin' Donuts' dominant strategy is to pick a price of $0.85 . What is the Nash equilibrium for this​ game? A. Krispy Kreme will choose a price of ​$1.25 and​ Dunkin' Donuts will choose a price of ​$0.85. B. Krispy Kreme and​ Dunkin' Donuts will both choose a price of ​$1.25. C. Krispy Kreme will choose a price of ​$0.85 and​ Dunkin' Donuts will choose a price of ​$1.25. D. Krispy Kreme and​ Dunkin' Donuts will both choose a price of ​$0.85. E. The game has no Nash equilibrium.

Answer 1

D. Krispy Kreme and​ Dunkin' Donuts will both choose a price of ​$0.85.

Step-by-step explanation:

DD - Dunkin' Donuts

KK - Krispy Kreme

If DD choose price to be $1.25, KK will choose price to be $0.85 because it gives them profit of $975 among $850 / $975

If DD choose price to be $0.85, KK will choose price to be $0.85 because it gives them profit of $650 among $250 / $650

Thus, KK have a dominant strategy to choose price = $0.85 no matter what DD choose.

If KK choose price to be $1.25, DD will choose price to be $0.85 because it gives them profit of $975 among $850 / $975

If KK choose price to be $0.85, DD will choose price to be $0.85 because it gives them profit of $650 among $250 / $650

Thus, DD have a dominant strategy to choose price = $0.85 no matter what KK choose.

Both firms have a dominant strategy of choosing price = $0.85 which creates a Nash equilibrium.