Question

2. Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sundays or whether it will close on Sundays. If both decide to close then each has profits of $21K. However, if one is open and the other is closed the open one has profits of $25K and the closed one has profits of $17K. If both remain open on Sundays then each has profits of $20.

(a) Place payouts in the appropriate cells of the payoff matrix.

(b) What is White’s best response to Gray opening on Sunday? To Gray closing on Sunday?

(c) What is the Nash equilibrium outcome?

Answer 1

a) The payoff matrix

b) if Grey is opening the store on Sunday he will earn 25k and white will only earn 17k, So white will be at a loss. He will open the store too.

Similarly, if the White opens the store then Grey will be loosing. He will also open the store with White on Sunday.

c) The Nash equilibrium is a situation from where a single player can't deviate unilaterally or he will face loss. The Nash Equilibrium of this game will be Both white and grey opening the store on Sunday. Because of any player deviate from this strategy of opening the store and keeps the store closed he will be loosing.