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Ec101F09practiceExamKey

Ec101F09practiceExamKey - c Copi Ec101 Fall 2009 Answer key...

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ˇ Copiˇ c, Ec101, Fall 2009, Answer key to the practice exam. 1. (c) If firm 1 enters then the best firm 2 can do is to acquiesce; when deciding to enter or not, the best firm 1 can then do is to enter (comparing 0 and 4). 2. (b) 3. (a) (The point of this exercise is that in a sequential game there are other Nash equilib- ria apart from the subgame-perfect NE but those other ones may involve non-credible threats; also, you should read the notation well and note that the first action in paren- thesis describes the US strategy, the second one describes the strategy of USSR which depends on the history; see also lecture notes 2) The first is a subgame perfect NE so that it is also a NE (none of them have reasons to change their strategies); the second is a NE but it involves an incredible threat: if US were to deviate and attack, then USSR would retaliate (crazy as that may be). Thus, given the strategy (or behavior) of USSR) it is not optimal for US to change its strategy. Given US behavior, USSR has no reason to change its strategy, hence this is
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