problem-set-3-answers

problem-set-3-answers - Economics 703 Advanced...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 703 Advanced Microeconomics Prof. Peter Cramton Problem Set 3: Suggested Answers 1. Rubinstein's bargaining solution is (1 - δ 2 )/(1 - δ 1 δ 2 ) where d i i = - e t , t>0 is the time between offers and i is player i's interest rate. We are interested in lim lim ( ) , ( ) ( ) t t t t t t e e e e B - - + B - - + - - = + = + 0 0 2 1 2 2 1 2 1 1 2 1 2 2 1 2 where the first inequality follows from l'Hôpital's rule. 2. Since η * > 0, d(q * -r)/da > 0, so the firms are farther from r during a boom (higher a). The intuition is that a high demand intercept means that prices are high, so the one-shot payoff from deviating from q * (by dumping q>>q * on the market) is high. Therefore, stern punishments are required to keep firms in line. Alternatively, the cartel can relax the quantity restriction somewhat, as happens here. 3. (a) There are two pure-strategy equilibria: player 1 always raises, so player 2 quits immediately, yielding a payoff of ($9, 0); and player 2 always raises, so player 1 quits immediately, yielding a payoff of (0, $10). (b) Past bids should be thought of as sunk costs, since they are paid regardless of whether you win or lose.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

problem-set-3-answers - Economics 703 Advanced...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online