ECOS2001 Tutorial 11
1
ECOS 2001 Tutorial 11
1. Two firms are selling an identical product and they both have constant marginal
costs of c. If the firms simultaneously set prices, what is the Nash equilibrium in this
game?
2. There are two firms in a market selling a homogeneous good. They have identical
constant marginal costs of production of c. Inverse demand for a product is given
P(Q) = a – bQ, where Q = q1 + q2. Firms simultaneously set quantities.
(a)
Derive the reaction function for each firm.
(b)
Find the Nash equilibrium in this game. Compare it to the perfectly
competitive outcome and the monopoly outcome.
3. Consider the following entry game. Virgin Blue can enter the market (E) or decide
to not enter (NE). If they choose NE Qantas gets a profit of 20 and Virgin gets a profit
of 5. If Virgin chooses to E, Qantas can then choose to either punish (P) or
accommodate (A). If Qantas choose P the payoffs are 7 for Qantas and 5 for Virgin.
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 One '09
 NONE
 Game Theory, Qantas, Subgame perfect equilibrium

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