What is a Nash equilibrium? How is a Nash equilibrium different ...

[Jkov05]

What is a Nash equilibrium? How is a Nash equilibrium different from a dominant strategy equilibrium?
 
  What will be an ideal response?

Question 2

Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He asks his friend, Carmen, if she'd like to join him in setting up a partnership to start the business.
 
  What is one disadvantage in joining the partnership that Carmen should consider?
  A) Carmen should realize that profits in the partnership will be reduced by dividend payments to shareholders.
  B) Carmen should realize that the Jeremy will have complete control over the business because it was his idea.
  C) Carmen should realize that, as an owner of the business, she will be personally responsible for the debts of the business.
  D) Carmen should realize that the profits of the business will also be taxed as dividend income, so she faces the potential for double taxation of that business income.

[sokh]

Answer to Question 1

A combination of strategies is a Nash equilibrium if each player chooses a strategy that is a best response to the strategies of others. This means that when the players are in a Nash equilibrium, no player in the game will be able to change his strategy and improve his or her payoff.
In a Nash equilibrium each player has chosen a best response to the strategies the other players have chosen. In a dominant strategy equilibrium each player has chosen a strategy that is a best response to any strategy the other players could have chosen. So, while a dominant strategy equilibrium is also a Nash equilibrium, a Nash equilibrium is not necessarily a dominant strategy equilibrium.

Answer to Question 2

C