Question

Table 17-37​

Two restaurants with a focus on Mexican dining operate in Texama. Both Mitch’s Mexican and Tim’s Tacos need to decide whether to add Zesty Queso or Fresh Guacamole to their menus. The circumstances are that each firm wants to add only one of the two choices on their menu. Below you will find the profits for the stores, shown as: the payoff to Mitch; (2) the payoff to Tim.

		Tim's Tacos
		Zesty Queso	Fresh Guacamole
Mitch's Mexican	Zesty Queso	5, 5	9, 3
	Fresh Guacamole	3, 8	7, 7

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​Refer to Table 17-37. Based upon the information from the table, what is the Nash Equilibrium?

a. ​Zesty Queso, Zesty Queso

b. ​Zesty Queso, Fresh Guacamole

c. ​Fresh Guacamole, Zesty Queso

d. ​Fresh Guacamole, Fresh Guacamole

Answer 1

The Nash Equilibrium in this case is:

d. ​Fresh Guacamole, Fresh Guacamole

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This gives a payoff of (7, 7) to both the players.

Any deviation from this outcome reduces the payoffs.

If both players can agree to this outcome, they can jointly maximize profits.

If both players have agreed and know what the other player is doing, this is the optimal outcome.

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However, the dominant strategy of moving to Zesty Queso may alter their behavior due to greed, and both may end up losing profits.