problem7 - where the actions are “cooperate” and...

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Problem Set 7 Econ 115a November 14, 2007 Don’t forget to indicate your name and your TAs name! Due Date: Monday, Nov. 26. 1. Define (a) Prisoners’ Dilemma (b) Grim Strategy (c) Free Rider Problem 2. Consider a Cournot duopoly with identical firms. Say that in this market monopoply profits would be M whereas duopoly profits are D , with D < 1 2 M . (a) Suppose that the 2 firms are thinking of colluding so that each produced 1 2 of the monon- poly output, 1 2 Q M . What would profits be if they actually did this? (b) Show, on a graph, what would be the optimal response of firm 2 if firm 1 did produce 1 2 Q M . Is the optimal quantity, q * 2 ( 1 2 Q M ), you just graphed greater or less than the Cournot duopoly output? (c) Thinking about your last answer, what would be the best way for firm 2 to “cheat” if firm 1 really did try to collude by producing 1 2 Q M ? (d) Denote profits at the best response q * 2 ( 1 2 Q M ) as R , with D < R < 1 2 M . Draw a “prisoners’ dilemma” table that shows the pay-offs of the two possibly colluding firms,
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Unformatted text preview: where the actions are “cooperate” and “cheat” and the payoffs are one of D , R and M . (e) Would the two firms collude if they competed for only one period? 3. Suppose that 4 roommates are planning to spend a Saturday night in their dorm room watching old movies. They are debating how many to watch. Here is their willingness to pay for each movie: John Eric Brian Adam 1st film $7 $5 $3 $2 2nd film $6 $4 $2 $1 3rd film $5 $3 $1 $0 4th film $4 $2 $0 $0 5th film $3 $1 $0 $0 1 (a) Suppose that renting a movie costs $4. If each person privately rented a movie to watch on their own, how many would each person rent? (b) Suppose that each roommate enjoys watching movies together just as much as alone. Within a dorm room, then, is the showing of a movie a public good? Why or why not? (c) If it costs $8 to rent a movie, how many should they rent to maximize total surplus? 2...
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This note was uploaded on 04/08/2008 for the course ECON 115 taught by Professor Stevenberry during the Fall '07 term at Yale.

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problem7 - where the actions are “cooperate” and...

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