Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. You may find it easier to answer the following questions if you fill in the payoff matrix below. 
width="383" />In this situation, the Nash equilibrium yields a:
A. higher payoff than each would receive if each played his dominant strategy.
B. lower payoff than each would receive if each played his dominated strategy.
C. lower payoff than each would receive if each played his dominant strategy.
D. the same payoff that each would receive if each played his dominated strategy.
Answer: B
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Which oligopoly model was developed to explain price wars in an industry?
a. natural oligopolies b. cartels c. price leadership by a dominant firm d. game theory e. cost-plus theory
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Suppose there are two firms in a market: firm A and firm B. Further, assume that they produce a homogenous product at a constant marginal cost of $10. In the Bertrand model solution, firm A will charge a price
A. smaller than firm B. B. greater than $10. C. greater than firm B. D. equal to $10.