Question

When a Nash equilibrium is reached:

a.	the outcome will only change if the "lead" player changes his strategy

b.	everyone is happy

c.it must be true that all players have a dominant strategy d.no one has an incentive to break the equilibrium by changing his strategy

Assume there are three hardware stores in the market for hammers and that all three markets produce a single, standard model hammer. House Depot is an enormous mass producer of hammers and can offer a hammer for sale for a minimum of $7. Lace Hardware is a franchise and can offer the hammer for sale for a minimum of $10. Bob's Hardware store is a family owned and operated, independent hardware store and can offer hammers at a minimum price of $13.

Given the scenario described, if the market price of hammers increased from $9 to $13:

a.producer surplus would increase only for House Depot

b.producer surplus would remain unchanged for Bob's Hardware

c.producer surplus would increase by $4 for Lace Hardware

d.producer surplus would increase for each producer.

Answer 1

A nash equilibrium is reached when both the players chooses its highest payoffs given the opponent has already chosen its pay off. Thus when a nash equilibrium is reached both the players has chosen their best payoffs and diverging from that payoff will result in a lower pay off for that player.

Ans: D) no one has the incentive to break the equilibrium.

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Bob's Hardware has the minimum offering price of 13 and its quantity offered is 0 below a price of 13. Thus when price is increased from 9 to 13, both House Depot and Lace Hardware's producers surplus increases as their minimum offering price is below 13. But producers surplus remains the same for Bob's Hardware.

Ans: b) producers surplus remains unchanged for Bob's Hardware.