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Unformatted text preview: 1 Problem Set 3 (Lecture 4, March 23) ECOS3012  Strategic Behavior, Semester 1, 2011 Exercise 1. Do all the end of chapter problems from the chapter titled “Rationalizability and Iterated Dominance” in Watson’s text. Exercise 2. ( Price Competition with differentiated Products ). Recall the way we calculated the reaction functions for Cournot Duopoly using calculus. Firm 1 and Firm 2 compete in two related markets. If the two firms set a price of p 1 > 0 and p 2 > respectively, the respective quantity they can sell is given by the equations q 1 = 12 p 1 + p 2 and q 2 = 12 p 2 + p 1 provided q 1 ≥ 0 and q 2 ≥ 0. Profits are zero otherwise. Firms maximize profits and each firm’s marginal cost of production is zero. Assume firms compete by simultaneously choosing prices. (a) Express the above as a strategic form game, i.e. write down the payoff functions. Given the payoff functions, do you think that the products of the two firms are more like substitutes or complements?...
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 Spring '11
 etw

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