Consider a town where initially there is one firm, HealthyBreakfast, Inc., in the market for breakfast cereal. It operates as a monopolist. A new firm, TastyCereal, Inc., is deciding whether to enter the market, which would change it into a duopoly.
If TastyCereal enters, HealthyBreakfast could try to run TastyCereal out of business by increasing output and driving prices down. Or, it could reduce output to offset the increased production by the entrant and keep prices high.
For simplicity, assume that HealthyBreakfast can charge a high price or a low price, and the new firm can decide whether to enter.
The payoff matrix below shows the payoff for each firm that corresponds to its strategy. Assume that this is a one-shot game in which both players choose their actions simultaneously.
Note that payoffs in the matrix (profit for each firm) are in millions of dollars.
Using the matrix in the picture provided as an example,
What is the Nash equilibrium in this game?
A. HealthyBreakfast charges a low price, and TastyCereal does not enter the market.
B. HealthyBreakfast charges a high price, and TastyCereal enters the market.
C. HealthyBreakfast charges a low price, and TastyCereal enters the market.
D. HealthyBreakfast charges a high price, and TastyCereal does not enter the market.
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