3. Two stores are located side by side. They attract customers to each other and to themselves by advertising. The profit functions of the two stores are (45+ x₂)x₁-2 for store 1 and (90+ x₁)x2 - 2x for store 2, where x₁ and x2 are total advertising expenditures by stores 1 and 2, respectively. If each store sets its advertising expenditures independently (as in Nash equilibrium), how much would store 1 spend on advertising? Call this amount A₁. How much would store 1 spend on advertising if it and store 2 act as one firm that maximizes profit? Call this amount A₁M. 3.1 Calculate A₁-

3. Two stores are located side by side. They attract customers to each other and to themselves by advertising. The profit functions of the two stores are (45+ x₂)x₁-2 for store 1 and (90+ x₁)x2 - 2x for store 2, where x₁ and x2 are total advertising expenditures by stores 1 and 2, respectively. If each store sets its advertising expenditures independently (as in Nash equilibrium), how much would store 1 spend on advertising? Call this amount A₁. How much would store 1 spend on advertising if it and store 2 act as one firm that maximizes profit? Call this amount A₁M. 3.1 Calculate A₁-

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter15: Strategic Games

Section: Chapter Questions

Problem 5MC

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Exercise 6.5 Suppose there are only two companies (1 and 2) that fix flat tyres in the local market and compete in a duopoly of Cournot. The two companies repair punctures identically, so consumers will not care about repairing the puncture in company 1 or 2. The inverse demand curve for this market is: P=100-2Q, where Q is the total number of punctures repaired per day by the two companies, that is: Q=q1+q2. The marginal cost of repairing a flat tyre for company 1 is 12 euros, while for company 2 it is 20 euros. We will assume that neither company has fixed costs. a) Suppose that this market is a Stackelberg oligopoly and that company 1 is the first to decide how many punctures to repair each day. How many punctures a day will each company repair? What will be the market price of repairing a puncture? How much profit will each company make per day? b) Suppose now that the two firms, instead of competing in quantities, compete on prices according to Bertrand's model. Determine what the…
Exercise 6.4. Suppose there are only two companies (1 and 2) that fix flat tyres in the local market and compete in a duopoly of Cournot. The two companies repair punctures identically, so consumers will not care about repairing the puncture in company 1 or 2. The inverse demand curve for this market is: P=100-2Q, where Q is the total number of punctures repaired per day by the two companies, that is: Q=q1+q2. The marginal cost of repairing a flat tyre for company 1 is 12 euros, while for company 2 it is 20 euros. We will assume that neither company has fixed costs. a) Suppose that this market is a Stackelberg oligopoly and that company 1 is the first to decide how many punctures to repair each day. How many punctures a day will each company repair? What will be the market price of repairing a puncture? How much profit will each company make per day? b)Suppose now that the two firms, instead of competing in quantities, compete on prices according to Bertrand's model. Determine what the…
Exercise 6.4. Suppose there are only two companies (1 and 2) that fix flat tyres in the local market and compete in a duopoly of Cournot. The two companies repair punctures identically, so consumers will not care about repairing the puncture in company 1 or 2. The inverse demand curve for this market is: P=100-2Q, where Q is the total number of punctures repaired per day by the two companies, that is: Q=q1+q2. The marginal cost of repairing a flat tyre for company 1 is 12 euros, while for company 2 it is 20 euros. We will assume that neither company has fixed costs. a) Get the profit functions of each of the companies based on q1 and q2. b) Obtain the reaction curves of each of the companies. c) How many punctures a day will each company repair in the Cournot equilibrium? d) What will be the market price of repairing a puncture? e) What profit will each company obtain in a day? f) Show with graphs.
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4)The result with unspecified N firms can be applied to N approaching infinity. Q2) Which of the following statements about the classic Cournot duopoly model is incorrect? 1)The products of the two firms are homogeneous. 2)It is a static game with complete information. 3)The two firms decide on their prices and let their quantities be dictated demand conditions. 4)There exist examples that have unique Nash equilibrium points