Macroeconomics
13th Edition
ISBN: 9780134735696
Author: PARKIN, Michael
Publisher: Pearson,
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Question
Chapter 15, Problem 5SPA
(a)
To determine
Identify the strategies and construct the payoff matrix of the game.
(b)
To determine
Identify the equilibrium point if the games are played only once.
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2. Consider the following game:
Soapy Inc. and Suddies Inc. are the only producers of soap
powder. They collude and agree to share the market equally.
If neither firm cheats on the agreement, each makes $1
million profit. If either firm cheats, the cheat makes a profit
of $1.5 million, while the complier incurs a loss of $0.5
million. If both cheat, they break even. Neither firm can
monitor the other's actions.
a) Construct the payoff matrix.
b) What is the dominant strategy?
c) What is the nash equilibrium for this game?
Imagine two competitor firms are deciding whether to advertise their products or
not. Advertising costs the firms money, but it also increases sales. If only one of
the two firms advertises, that firm will take almost all of the sales. If both firms
advertise, or both firms do not advertise, then they will have about half the sales
each. Here are their payoffs.
Firm A
Advertise
Don't advertise
Advertise
20 20
0 80
*
Firm B
Don't Advertise
80 0
50 50
a) Find any Nash equilibria in the game.
b) Discuss and explain the Pareto-optimality of any equilibria you find.
c) Discuss how you might achieve stable Pareto-optimality.
Save Answer
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies spit the market and earn $60 million each. If they both advertise, they
again split the market, but profits are lower by $20 million since each company must bear the cost of advertisirlg. Yet if one company advertises while the other does not, the one that
advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will
these two companies do if they behave as individual profit maximizers?
Neither company will advertise, and PM Inc. earns $60.
One company will advertise, the other will not. Brown Inc. earns $70.
Both companies will advertise, and PM Inc. earns $40.
Both companies will advertise, and PM Inc. earns $60.
Chapter 15 Solutions
Macroeconomics
Ch. 15.1 - Prob. 1RQCh. 15.1 - Prob. 2RQCh. 15.1 - Prob. 3RQCh. 15.1 - Prob. 4RQCh. 15.2 - Prob. 1RQCh. 15.2 - Prob. 2RQCh. 15.2 - Prob. 3RQCh. 15.2 - Prob. 4RQCh. 15.2 - Prob. 5RQCh. 15.2 - Prob. 6RQ
Ch. 15.3 - Prob. 1RQCh. 15.3 - Prob. 2RQCh. 15.4 - Prob. 1RQCh. 15.4 - Prob. 2RQCh. 15.4 - Prob. 3RQCh. 15.4 - Prob. 4RQCh. 15.4 - Prob. 5RQCh. 15 - Prob. 1SPACh. 15 - Prob. 2SPACh. 15 - Prob. 3SPACh. 15 - Prob. 4SPACh. 15 - Prob. 5SPACh. 15 - Prob. 6SPACh. 15 - Prob. 7SPACh. 15 - Prob. 8SPACh. 15 - Prob. 9APACh. 15 - Prob. 10APACh. 15 - Prob. 11APACh. 15 - Prob. 12APACh. 15 - Prob. 13APACh. 15 - Prob. 14APACh. 15 - Prob. 15APACh. 15 - Prob. 16APACh. 15 - Prob. 17APACh. 15 - Prob. 18APACh. 15 - Prob. 19APACh. 15 - Prob. 20APACh. 15 - Prob. 21APACh. 15 - Prob. 22APACh. 15 - Prob. 23APA
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