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Econ3014 Fall, 2011
Instructor: Yan YU
Problem Set #5 (due Nov. 24
th
Thursday 5pm in room 2394)
1.
(8. 7) Compute the Nash equilibrium in randomized strategy for the following
game.
Bob
Left
Right
Top
(3, 6)
(4, 5)
Ann
Bottom
(6, 4)
(2, 6)
2.
(7.2, 6.1, 8.4) Consider a duopolistic market with two firms, A and B, facing a
market demand curve of P=122q
A
–q
B
for the same product. Assume that each
firm has access to the same technology and the cost of production is C
A
=2q
A
for
firm A and C
B
=2q
B
for firm B.
(1) How many units does each firm produce in the Nash equilibrium (this is
Cournot model)? What is each firm’s profit?
(2) If the two firms form a cartel and restrict supply to maximize joint profit, what
is the optimal output level for each firm if they split the product equally? What is
each firm’s profit?
(3) Denote the optimal output level in part (2) Q
0
. Suppose firm A follows the
quota Q
0
, what is firm B’s strategy (in terms of output level) to maximize his own
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