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04 final 10

# 04 final 10 - Promote 900 900 Nash Promote Flat Not Promote...

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Unformatted text preview: Promote 900, 900 Nash Promote Flat Not Promote 1300, 800 x Promote ot Promote Flat <: Not Promote 1000, 1000 x 800, 1300 The Nash equilibrium in this sequential game with Sharp as the leader is for both stores to promote, which is the same outcome as that when the game is played in normal form. The same result would emerge if Flat was the leader. Therefore, there is no first-mover advantage for Sharp. (3 marks) g) In the sequential game for part (i), would Sharp be better off or worse off if the cost of promotion for both stores were equal to \$450 rather than to \$300. Brieﬂy explain. If the cost of promotion for both stores was \$450 rather than \$300, then the game tree looks like Promote Flat <: Promote 750, 750 x Not Promote 1150, 800 Nash Promote 800, 1 150 ot Promote Flat Not Promote 1000, 1000 x Sharp earns \$1150 in this game versus \$900 in the previous game (with \$300 cost of promotion). Therefore, Sharp is better off with the higher cost of promotion. Two marks for correctly identifying the new equilibrium (it is not necessary for a new game tree to be drawn to calculate the new equilibrium point). On mark for indicating that the higher cost eliminated Flat’s dominant strategy (i.e., Flat now chooses the opposite strategy as that chosen by Sharp), and thus Sharp obtains the ﬁrst-mover advantage. Question 14: Suppose that ﬁrms A and B are the only two producers of bread and that they compete in quantities. Their products are identical. A’s ﬁxed cost of production = \$ 20 and B’s ﬁxed cost of production is \$ 15, and both have marginal cost equal to \$3. The demand function for bread is Q = 100 — lOP. The two ﬁrms compete for one period only. (10 marks) (a) Fill out the following table of equilibrium values, showing your work clearly in the space below the table: Quantityproduced by ﬁrm A (2.5 marks) 23.33 Quantitygoduced by ﬁrm B (2.5 marks) 23.33 Market Price (2 marks) \$ 5.33 Proﬁts of ﬁrm A (1.5 marks) \$ 34.36 Proﬁts afﬁrm B (1.5 marks) \$ 39.36 11 ...
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