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Problem Set #3: Player II L C R

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15 views3 pages

Problem Set #3: Player II L C R

Uploaded by

Amna Kashif
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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=Problem Set #3 NAME:

Microeconomics II – Winter Term 2024

NO LATE PROBLEM SETS WILL BE ACCEPTED!

1. Find the unique pure strategy Nash equilibrium of the following game. The first number
in each box refers to the payoff to Player 1. The second number in each box refers to the
payoff to Player 2.

Player II

L C R

T 1, -2 -2, 1 0, 0

Player I

M -2, 1 1, -2 0, 0

B 0,0 0, 0 1, 1

2. Answer the following questions based on the payoff matrix below. Firm 1 and Firm 2
can each produce either 10 or 20 units. The first number in each box refers to the payoff
to Firm 1. The second number in each box refers to the payoff to Firm 2

Firm 2

Q=10 Q=20

30, 30 55, 45
Q=10
Firm 1

40, 60 20, 20
Q=20
a. What are the two pure strategy Nash equilibria of the static game (i.e. if the two firms
make their decision simultaneously)? Explain.
b. Does either firm have a dominant strategy in the static game (i.e. if the two firms make
their decision simultaneously)? Explain
c. What is the Nash equilibrium in mixed strategies? What are the expected payoffs from
the optimal mixed strategies? When you solve for the mixed strategy equilibrium:
Let Firm 1 choose 10 with probability r, and 20 with probability 1-r, and
Let Player 2 choose 10 with probability q, and 20 with probability 1-q.
d. Suppose that we make this a dynamic game, so that Firm 1 can decide first. What is the
outcome? Why? Draw the game tree of this dynamic game.
e. Suppose again that this is a dynamic game, so that Firm 2 can decide first. What is the
outcome? Why? Draw the game tree of this dynamic game.

3. The restaurant hamburger market in a small town has two firms. The product is
undifferentiated (in other words, homogeneous) and the demand curve is Q = 200 – 2P.
Firm 1 has constant average total cost of $4 per unit, and firm 2 has constant average total
cost of $7. If the two firms simultaneously choose prices, what is the Bertrand
equilibrium? How much will each firm sell, and what will each firm’s profit be?

4. Suppose there are two firms. If they act as Cournot oligopolists, they each earn $64. If
they collude and act as a cartel, they each earn $72.
Firm 2
Q=8 Q=6
64, 64 80, 60
Firm Q=8
1 60, 80 72, 72
Q=6

a. Suppose this is a static (one-period) game. What is the Nash Equilibrium. Explain.
b. Suppose this is an infinitely repeated game and the firms operate under the threat of
infinite punishment. Describe the strategy (in terms of the actions of each firm). What
would their payoff streams look like?
c. What would be the payoff stream if one firm deviates from the strategy? What is the
necessary condition for cooperation

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