1.Draw the extensive form representation of this game. 2. Find a subgame perfect equilibrium (SPE) of this game.  focus on pure-strategies only.

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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1.Draw the extensive form representation of this game.

2. Find a subgame perfect equilibrium (SPE) of this game.  focus on pure-strategies only.

Stage 1.– Firms 1 and 2 simultaneously choose how much to spend on advertising.
Let a, and az denote the advertising levels of firms 1 and 2, respectively. Suppose
that advertising costs are 2. q? for firm 1, and 2. g? for firm 2.
Stage 2.– Having observed a, and a2, both firms play a simultaneous Cournot-
quantity competition game. The market price is given by the equation
p = 20 + dj + az – q1 – 92.
Assume that production costs are c(gi) = 5 · gi for i = 1, 2.
Transcribed Image Text:Stage 1.– Firms 1 and 2 simultaneously choose how much to spend on advertising. Let a, and az denote the advertising levels of firms 1 and 2, respectively. Suppose that advertising costs are 2. q? for firm 1, and 2. g? for firm 2. Stage 2.– Having observed a, and a2, both firms play a simultaneous Cournot- quantity competition game. The market price is given by the equation p = 20 + dj + az – q1 – 92. Assume that production costs are c(gi) = 5 · gi for i = 1, 2.
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