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...
The question is here:
http://img101.imageshack.us/img101/2884/econ.png
How do you do the circling method?
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).