Quiz 5 Solution - Quiz 5 Solution 1 DD P=500-y where y = y1...

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Quiz 5 Solution 1. DD : P=500-y: where 3 2 1 y y y y + + = 3 2, 1, , 100 100 = = = i MC y TC i i Firm 1’s residual demand function: 1 3 2 1 ) 500 ( y y y p - - - = ,. 1 3 2 1 2 1 1 3 1 2 1 1 2 500 500 y y y MR y y y y y y TR - - - = - - - = Profit maximized at 1 1 MC MR = . Thus, the Best Reaction Function for Firm 1 is 2 400 100 2 500 3 2 * 1 1 3 2 y y y y y y - - = = - - - Since firms are has identical costs (i.e. they are symmetric), y y y y = = = 3 2 1 . Thus, 3 2 1 100 200 2 2 400 2 400 y y y y y y y y y = = = = - = - = - - = Correct answer: (b) 2. 200 300 500 300 3 3 2 1 = - = = = + + = p y y y y Y Then, for 3 2, , 1 = i , the profit for firm i is 10000 ) 100 ( 100 ) 100 ( 200 = - = - = i i i TC py π Correct answer: (c) 3. This is a case of shared monopoly. Correct answer: (b). 4. Correct answer: (b). 5. (a) A dominant strategy is that strategy which gives the best outcome irrespective of the strategy chosen by the other player(s). 5. (b) Advertise is a dominant strategy for both companies. Page 1 of 4
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5. (c) See textbook P.486. Generally, it is a combination of strategies that neither player has incentive to change.
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