Answered: nd Airbus, change in profits ($m) from…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 5CQQ

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4. Boeing and Airbus, change in profits ($m) from the development of a super jumbo jet.
Airbus
Develop Do not develop
Boeing Develop -50, -50 -30, 80
Do not develop 80, -30 0, 0

a) Identify the key assumption of Game theory
b) What important lesson does game theory reveal about coordination in
an oligopoly market?
c) In the game above, what is the Nash equilibrium?

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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