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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