chap010s - Chapter 10: Answers to Questions and Problems 1....

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Managerial Economics and Business Strategy, 5e Page 1 Chapter 10: Answers to Questions and Problems 1. a. Player 1’s dominant strategy is B. Player 2 does not have a dominant strategy. b. Player 1’s secure strategy is B. Player 2’s secure strategy is E. c. (B, E). 2. a. b. B is dominant for each player. c. (B, B). d. Joint payoffs from (A, A) > joint payoffs from (A, B) = joint payoffs from (B, A) > joint payoffs from (B, B). e. No; each firm’s dominant strategy is B. Therefore, since this is a one-shot game, each player would have an incentive to cheat on any collusive arrangement. 3. a. Player 1’s optimal strategy is B. Player 1 does not have a dominant strategy. However, by putting herself in her rival’s shoes, Player 1 should anticipate that Player 2 will choose D (since D is Player 2’s dominant strategy). Player 1’s best response to D is B. b. Player 1’s equilibrium payoff is 5. 4. a. (A, C). b. No. c. If firms adopt the trigger strategies outlined in the text, higher payoffs can be achieved if 1 . Cheat Coop Coop N i ππ Here, π Cheat = 60, π Coop = 50, π N = 10 , and the interest rate is i = .05 . Since 60 50 1 0.25 50 10 4 Cheat Coop Coop N −− == = < 11 20 .05 i each firm can indeed earn a payoff of 50 via the trigger strategies. d. Yes. Player 2 Strategy A B A $500, $500 $0, $650 Player 1 B $650, $0 $100, $100
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Page 2 Michael R. Baye 5. a. x > 2. b. x < 2. c. x < 2. 6. a. See the accompanying figure. ($0, $15) Right Right ($10, $10) Left Left (-$10, $8) b. ($0, $15) and ($10, $10). c. ($10, $10) is the only subgame perfect equilibrium; the only reason ($0, $15) is a Nash equilibrium is because Player 2 threatens to play left if 1 plays left. This threat isn’t credible. 7. a. Player 1 has two feasible strategies: A or B. Player 2 has four feasible strategies: (1) W if A and Y if B; (2) X if A and Y if B; (3) W if A and Z if B; (4) X if A and Z if B. b. (60, 120) and (100, 150). c. (100, 150). 8. a. There are two Nash equilibria: (5, 5) and (20, 20). The (5, 5) equilibrium would seem most likely since the other equilibrium entails considerable risk if the players don’t coordinate on the same equilibrium.
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chap010s - Chapter 10: Answers to Questions and Problems 1....

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