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2.consider Two Firms Facing The Demand Curve P 50 5Q, Where Q Q1 + Q2. The Firms' Cost

This document contains several examples of game theory concepts including Cournot competition, Nash equilibria, and maximin strategies. It provides profit matrices and demand curves to analyze outcomes between firms under different assumptions about their strategic interactions and abilities to commit to strategies first. Equilibria concepts like Cournot and Nash are used to determine optimal production quantities, prices, and profits. Head starts and the ability to commit early are also considered in a two-stage game setting.

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192 views3 pages

2.consider Two Firms Facing The Demand Curve P 50 5Q, Where Q Q1 + Q2. The Firms' Cost

This document contains several examples of game theory concepts including Cournot competition, Nash equilibria, and maximin strategies. It provides profit matrices and demand curves to analyze outcomes between firms under different assumptions about their strategic interactions and abilities to commit to strategies first. Equilibria concepts like Cournot and Nash are used to determine optimal production quantities, prices, and profits. Head starts and the ability to commit early are also considered in a two-stage game setting.

Uploaded by

arun
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. A monopolist can produce at a constant average (and marginal) cost of AC = MC = $5.

It faces
a market demand curve given by Q = 53 − P.
a. Calculate the profit-maximizing price and quantity for this monopolist. Also calculate its profits.

b. Suppose a second firm enters the market. Let Q1 be the output of the first firm and Q2 be the
output of the second. Market demand is now given by Q1 + Q2 = 53 − P.
Assuming that this second firm has the same costs as the first, write the profits of each firm as
functions of Q1 and Q2.
c. Suppose (as in the Cournot model) that each firm chooses its profit-maximizing level of output
on the assumption that its competitor’s output is fixed. Find each firm’s “reaction curve” (i.e.,
the rule that gives its desired output in terms of its competitor’s output).
d. Calculate the Cournot equilibrium (i.e., the values of Q1 and Q2 for which each firm is doing as
well as it can given its competitor’s output). What are the resulting market price and profits of
each firm?
e. Suppose there are N firms in the industry, all with the same constant marginal cost, MC = $5.
Find the Cournot equilibrium. How much will each firm produce, what will be the market price,
and how much profit will each firm earn? Also, show that as N becomes large, the market price
approaches the price that would prevail under perfect competition.

2.Consider two firms facing the demand curve P = 50 − 5Q, where Q = Q1 + Q2. The firms’ cost
functions are C1(Q1) = 20 + 10Q1 and C2(Q2) = 10 + 12Q2.
a. Suppose both firms have entered the industry. What is the joint profit-maximizing level of
output? How much will each firm produce? How would your answer change if the firms have not
yet entered the industry?
b. What is each firm’s equilibrium output and profit if they behave noncooperatively? Use the
Cournot model. Draw the firms’ reaction curves and show the equilibrium.
c. How much should Firm 1 be willing to pay to purchase Firm 2 if collusion is illegal but a takeover
is not?
3. Two firms are in the chocolate market. Each can choose to go for the high end of the market
(high quality) or the low end (low quality). Resulting profits are given by the following payoff

matrix:a.
a.What outcomes, if any, are Nash equilibria?
b.If the managers of both firms are conservative and each follows a maximin strategy, what will
be the outcome?
c.What is the cooperative outcome?
d. Which firm benefits most from the cooperative outcome? How much would that firm need to
offer the other to persuade it to collude?
4. Two computer firms, A and B, are planning to market network systems for office information
management. Each firm can develop either a fast, high-quality system (High), or a slower, low-
quality system (Low). Market research indicates that the resulting profits to each firm for the
alternative strategies are given by the following payoff matrix:

a.If both firms make their decisions at the same time and follow maximin (low-risk) strategies,
what will the outcome be?
b. Suppose that both firms try to maximize profits, but that Firm A has a head start in planning
and can commit first. Now what will be the outcome? What will be the outcome if Firm B has the
head start in planning and can commit first?
c. Getting a head start costs money. (You have to gear up a large engineering team.) Now consider
the two-stage game in which, first, each firm decides how much money to spend to speed up its
planning, and, second, it announces which product (H or L) it will produce. Which firm will spend
more to speed up its planning? How much will it spend? Should the other firm spend anything to
speed up its planning? Explain.

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