Fellow forum members,
Would you be able to help me understand the Nash equilibrium question on page 194 in the CFA Econ book?
I wasn’t sure it pasting the question would violate any copyrights, but I did find the same question on the net – here it is, question 8:
http://books.google.com/books?id=JWukN4yX3WwC&pg=PT19&lpg=PT19&dq=sigmasoft+thetatech+nash&source=bl&ots=KiFSzGO8a0&sig=f9WZHTh3ta34ydhgdVCTYgY13G8&hl=en&sa=X&ei=dextUf-eKMrD4AOXo4D4Cw&ved=0CC8Q6AEwAA
I don’t understand how we know that ThetaTech is the first firm to make the decision, and SigmaSoft is the second. What is it in the questions that would point that out to me?
Could I not just as well assume that it is SigmaSoft making the first decision, and therefore the lower left rectangle would be the Nash equilibrium?
Actually, I think I might have answered my own question by re-reading the sentence on page 176 of the CFA Econ book, where it says that the option with the maximum joint profits would be the solution. So I suppose it doesn’t matter which firm has the first or second decision – the option with largest joint profit is the best for the Nash equilibrium.
If someone reads this and thinks that this is wrong, please kindly let me know.
I’m still very iffy on the whole concept of the Nash equilibrium, and I know that it’s a large subject that’s only skimmed in the book.
I think you are right. You just have to determine which option brings largest joint profit. Doing so I got answer C…