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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 oneshot 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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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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 Spring '11
 zeng

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