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Math Help - Economics question

  1. #1
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    Economics question

    The question is here:

    http://img101.imageshack.us/img101/2884/econ.png

    How do you do the circling method?
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  2. #2
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    I think the Nash Equilibrium is where Firm A and Firm B both set price as 40, right? Still not sure what the circling method means though...
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  3. #3
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    You have the right answer for the nash equilibrium.


    The circling method is a quick way to identify NE in a 2 player matrix. Here is what you do.

    Step1: Circle the best responses for player A (row).
    To do this, look at each column in turn. Circle the highest payoff for player A in that column.

    What you are doing is circling the best response function of player A. (each column represents a strategy for player B, and you have circled the highest payoff that A can get if B plays that strategy)

    Repeat this for every column


    Step 2: Circle best responses for player B (column)
    To do this, look at each row in turn. Circle the highest payoff for player B in that row.

    What you are doing is circling the best response function for player B

    Repeat this for every Row


    Step3: identify nash equilibrium
    If any cell in the matrix has both payoffs circled, it is a nash equilibrium (because any cell that is on both players' best response functions is a NE by definition).
    Last edited by SpringFan25; May 23rd 2010 at 05:25 AM.
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