Review 5.pptx - REVIEW 5 • • • • • Summary of...

This preview shows page 1 - 7 out of 19 pages.

1 Summary of Week 5 Critical thinking question Q1 to Q6 Problem-Solving P1 to P6 REVIEW 5
Image of page 1

Subscribe to view the full document.

2 Question 1 What do Cournot & Bertrand models have in common? What is different about the two models? Both models assume firms produce a homogeneous good. In Cournot model, each firm assumes its rivals will not change the quantity produced. In Bertrand model, each firm assumes its rivals will not change the price they charge. In both models, each firm takes some aspect of its rivals behavior (either quantity or price) as fixed when making its own decision. Difference between the two is that in Bertrand model firms end up producing where P = MC, whereas in Cournot model, firms will produce more than the monopoly output but less than the competitive output.
Image of page 2
3 The Stackelberg leader gains the advantage because the second firm must accept the leader’s large output as given and produce a smaller output for itself. If the second firm decided to produce a larger quantity, this would reduce price and profit for both firms. The first firm knows that the second firm will have no choice but to produce a smaller output in order to maximize profit, and thus, the first firm is able to capture a larger share of industry profits. Question 2 In the Stackelberg model, the firm that sets output first has an advantage. Explain why.
Image of page 3

Subscribe to view the full document.

4 Question 3 What is the difference between a cooperative and a noncooperative game? Give an example of each. In a noncooperative game the players do not formally communicate in an effort to coordinate their actions. They are aware of one another’s existence, but act independently. The difference between a cooperative & a noncooperative game is that a binding contract , i.e., an agreement between the parties to which both parties must adhere, is possible in the former, but not in the latter. An example of a cooperative game would be a formal cartel agreement, such as OPEC, or a joint venture. An example of a noncooperative game would be a race in research and development to obtain a patent.
Image of page 4
5 Q4 How does a Nash equilibrium differ from a game’s maximin solution? In what situations is a maximin solution a more likely outcome than a Nash equilibrium? A maximin strategy is one in which each player determines the worst outcome for each of the opponent’s actions and chooses the option that maximizes the minimum gain that can be earned. Unlike Nash equilibrium, maximin solution does not require players to react to an opponent’s choice. If no dominant strategy exists (in which case outcomes depend on the opponent’s behavior), players can reduce the uncertainty inherent in relying on the opponent’s rationality by conservatively following a maximin strategy. The maximin solution is more likely than the Nash solution in cases where there is a higher probability of irrational (non-optimizing) behavior.
Image of page 5

Subscribe to view the full document.

6 Problem 1.a A monopolist can produce at a constant average (and marginal) cost of AC = MC = 5. It faces a market demand curve given by Q = 53 - P.
Image of page 6
Image of page 7

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern