In Class Assignment_Game Theory_2011

In Class Assignment_Game Theory_2011 - Lahore School of...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Lahore School of Economics Micro II – Sec A In class Assignment on Game Theory: Static Games 1. Two computer firms, A and B, are planning to market network systems for office  information management.  Each firm can develop either a fast, high-quality system  (H), or a slower, low-quality system (L).  Market research indicates that the resulting  profits to each firm for the alternative strategies are given by the following payoff  matrix: Firm B H L H 50, 40 60, 45 Firm A L 55, 55 15, 20 Suppose both firms try to maximize profits, but Firm A has a head start in planning,  and can commit first.  Now what will the outcome be?  What will the outcome be if  Firm B has a head start in planning and can commit first? If Firm A can commit first, it will choose  H , because it knows that Firm B will rationally  choose  L , since  L  gives a higher payoff to B (45 vs. 40).  This gives Firm A a payoff of 60.  If  Firm A instead committed to L, B would choose H (55 vs. 20), giving A 55 instead of 60.  If  Firm B can commit first, it will choose  H , because it knows that Firm A will rationally choose  L , since  L  gives a higher payoff to A (55 vs. 50).  This gives Firm B a payoff of 55. 2. Two firms are in the chocolate market.  Each can choose to go for the high end of  the market (high quality) or the low end (low quality).  Resulting profits are given  by the following payoff matrix: Firm 2 Low High Low -20, -30 900, 600 Firm 1 High 100, 800 50, 50
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
a. What outcomes, if any, are Nash equilibria? A Nash equilibrium exists when neither party has an incentive to alter its strategy, taking  the other’s strategy as given.  If Firm 2 chooses Low and Firm 1 chooses High, neither will  have an incentive to change (100 > -20 for Firm 1 and 800 > 50 for Firm 2).  If Firm 2  chooses High and Firm 1 chooses Low, neither will have an incentive to change (900 > 50  for Firm 1 and 600 > -30 for Firm 2).   Both outcomes are Nash equilibria.   Both firms  choosing low is not a Nash equilibrium because, for example, if Firm 1 chooses low then  firm 2 is better off by switching to high since 600 is greater than -30.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern