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7.Pitt versus Penn State. Pitt and Penn State must decide on next year’s in-state tuition for full-time undergraduate students. Surprisingly, neither university uses cost accounting methods to determine what the percentage increase in tuition should be. Instead, Pitt plans to increase Pitt tuition by 4% plus one-half of Penn State’s percentage increase in tuition. Similarly, Penn State plans to increase Penn State tuition by 3% plus two-thirds of Pitt’s percentage increase in tuition.a.Write the reaction functions (best response functions) for both universities.b.Find the percentage increase in tuition at both universities and explain why these comprise a Nash equilibrium. Whose tuition increase is the highest?
ECON 0200Summer 2012University of PittsburghMichael LeGower∆T