Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Chapter 14, Problem 1P
(a)
To determine
The game tree
To determine
The optimal solution of game through backward induction
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Consider the following entry game: Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard," firm B ensures that firm A makes a loss of $2 million, but firm B only makes $2 million in profits. On the other hand, if firm B plays "soft," the new entrant takes half of the market, and each firm earns profits of $4 million. If firm A stays out, it earns zero while firm B earns $8 million. Which of the following are Nash equilibrium strategies?
(not enter, hard) and (enter, soft)
(enter, soft) and (not enter, soft)
(enter, hard) and (not enter, soft)
(enter, hard) and (not enter, hard)
Consider the following static game with two firms as the players. Each firm must decide either to upgrade (U) an existing good to a new version; or not upgrade it (N). The decisions are simultaneous. If a firm chooses to upgrade, they have to pay a fixed cost of 7. If they don’t upgrade, there is no fixed cost. The marginal cost is always equal to 3. The demand side of the market is as follows: If neither firm upgrades, each firm sells 2 units at price 4. If both firms upgrade, each firm sells 3 units at price 5. If only one firm upgrades, the one who upgrades sells 5 units at price 5, and the other firm does not sell anything.
Perrier and Apollinaris. Perrier and Apollinaris are two companies that sell mineral water in Tampa, FL. Each company has a fixed cost of $5,000 per period, regardless whether they sell anything or not. The two companies are competing for the same market and each firm must choose a high price ($2 per bottle) or a low price ($1 per bottle). Here are the rules of the game: At a price of $2, 5,000 bottles can be sold for total revenue of $10,000. At a price of $1, 10,000 bottles can be sold for total revenue of $10,000. If both companies charge the same price, they split the sales evenly between them. If one company charges a higher price, the company with the lower price sells the whole amount and the company with the higher price sells nothing. Payoffs are total profits.
In this case, Apollinaris has:
no dominant strategy. Perrier has a dominant strategy of P=$1.
a dominant strategy of P=$1. Perrier also has a dominant strategy of P=$2.
a dominant strategy…
Chapter 14 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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