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Unformatted text preview: (a) . What is a subgame perfect equilibrium in this game? Use backward induction. Consider the subgame when it is Ann’s turn to move at the node on the left; Ann chooses ‘Enter’. Then consider the subgame when it is Ann’s turn to move at the node on the right; Ann chooses ‘Stay out’. The next subgame is the whole game itself at the initial node. Tom can choose ‘Use labor’ and end up with 400 or choose ‘Use robot’ and make 500, which is better. Therefore the Nash equilibrium in the leader follower game is (Use robot, Stay out). This example shows the value of commitment: an action that is dominated in a static game may be the optimal choice in a dynamic game....
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.
 Summer '07
 Dr.ShomuBanerjee
 Microeconomics, Game Theory

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