Question

Speedy gas

High Price Low price
Swifty Gas High Price $100, $100 $25,$150
Low price $150, $25 $50,$50

(Table: Two Rival Gas Stations) Use Table: Two Rival Gas Stations. The table shows a payoff matrix for two gas stations in a small town. Each firm can set either a high price or a low price, and customers view these two firms as nearly perfect substitutes. Profits in each cell of the payoff matrix are given as (Swifty's profit, Speedy's profit). Which statement describes a dominant strategy?

a. Swifty will always set a low price,no matter Speedy's choice.
b. Swifty will always set a high price,no matter Speedy's choice.
c. Swifty will set a low price when Speedy sets a high price,but Swifty will set a high price when Speedy sets a low price.
d. Swifty will set a high price when Speedy sets a high price,but Swifty will set a low price when Speedy sets a low price.

Answer 1

a. Swifty will always set a low price,no matter Speedy's choice.

Step-by-step explanation:

Swifty's dominant strategy should result in maximizing its profits regardless of what Speedy does. This is achieved by setting a low price, since that strategy could yield $150 + $50 = $200

If Swifty sets a high price it could earn = $100 + $25 = $125

Since $200 is higher than $125, then that would be Swifty's dominant strategy.