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Homework__2_game_theory_ProblemSet

Homework__2_game_theory_ProblemSet - Homework#2 1 The...

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Homework #2 1. The Ulysses Corporation and the Xenophon Corporation are the only producers of a very sophisticated digital camera. They can each engage in either a high or low level of advertising in trade journals. Xenophon projects that if they do a high level of advertising then they will earn about $11 million if Ullyses also does a high level of advertising, but they will earn $12 million if Ullyses does low-level advertising. On the other hand, Xenophon expects to earn about $13 million if they do low level advertising and so does Ullyses, but they think that if they do low-level advertising and Ullyses does high level advertising then they will earn $12 million. Ullyses projects that if they do high advertising then they will earn $13 million if Xenophon does low advertising, and they will earn $12 million if Xenophon does high advertising. On the other hand, Ullyses expects to earn $11 million if they do low advertising and Xenophon does high advertising, and $12 million if Xenophon also does low advertising. a. Should Ullyses engage in high or low advertising? b. Should Xenophon engage in high or low advertising? c. Does either firm have a dominant strategy? A dominated strategy? Explain. d. Is there a Nash equilibrium outcome? Explain. 2. Two firms, DR and TS, make identical goods and sell them in the same market. The demand in the market each year is Q = 1200 - P. Once a firm has built capacity, it can produce up to its capacity each period with a marginal cost of MC = 0. Building a unit of capacity costs 2400 (for either DR or TS). A unit of capacity lasts four years and has no salvage value. The interest rate is zero. Once production occurs each period, the price in
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