Problem Set 9

# Problem Set 9 - Econ. 221 Question 1 Key to Practice...

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Econ. 221 Key to Practice Problem Set 9 (Chapter 13) Question 1 a. Is there a Nash equilibrium in this game? Briefly explain. The Nash equilibrium occurs when both companies bid \$4 billion and each earns profits of \$0.75 billion. b. How might the situation be changed if the two companies expect to be bidding on many similar projects in future years? Firms that expect to play a game repeatedly tend to engage in strategic behavior , trying to influence each other's future actions. A particular strategy that seems to work well in such situations is tit for tat , which often leads to tacit collusion. Suppose in the first round, one firm bids high and the other bids low. The “tit for tat’ strategy is one in which one firm, say Bechtel, starts off by bidding high in the first period and then in the second period it does whatever Halliburton airline did in the previous period. Because the game is played repeatedly, the firms are more likely to avoid the prisoners’ dilemma outcome by both bidding \$5 billion. 2a. Present the information in a payoff matrix format given below. FORD \$4,000 \$8,000 \$12,000 \$4,000 π F = \$8 m π F = \$6 m π F = \$2 m π C = \$8 m π C = \$12 m π C = \$14 m π F = \$12 m π F = \$10 m π F = \$6 m CHEVROLET \$8,000 π C = \$6 m π C = \$10 m π C = \$12 m \$12,000 π F = \$14 m π F = \$12 m π F = \$7 m π C = \$2 m π C = \$6 m π C = \$7 m a. What price will Ford select, based on its assumption that Chevrolet will match any price it sets? Based on Ford’s assumption that Chevrolet will match any price it sets, Ford selects a price of \$8,000.

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## This note was uploaded on 05/10/2010 for the course ECON 221 taught by Professor Ramoo during the Spring '10 term at Diablo Valley College.

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Problem Set 9 - Econ. 221 Question 1 Key to Practice...

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