QUESTION 1 1. Consider the following game involving a duopoly (a market with only two firms). Assume both firms face 0 costs of production. Their payoffs (profits) are determined by the price p and the amount they produce q, i.e. p qi where qi is the level of production of firm i. We'll assume price is given by: P = 12 – q1 - q2 In this setting, Firm 1 and Firm 2 move simultaneously, choosing between Option A: Produce 4 units Option B: Produce 0 units After the firms have made their decision, Firm 1 observes what Firm 2 has done. If Firm 1 and Firm 2 have both selected Option A, Firm 1 moves again and decides between Option C: Increasing its production 2 more units to 6 units. Option D: Leaving its production at 4 units. The game then ends and the firms receive their profits (payoffs). In all other situations other than that described above, the game ends and the firms earn their profits (payoffs). Question A. Write this game down in extensive form. Question B. Write this game down in normal form.
QUESTION 1 1. Consider the following game involving a duopoly (a market with only two firms). Assume both firms face 0 costs of production. Their payoffs (profits) are determined by the price p and the amount they produce q, i.e. p qi where qi is the level of production of firm i. We'll assume price is given by: P = 12 – q1 - q2 In this setting, Firm 1 and Firm 2 move simultaneously, choosing between Option A: Produce 4 units Option B: Produce 0 units After the firms have made their decision, Firm 1 observes what Firm 2 has done. If Firm 1 and Firm 2 have both selected Option A, Firm 1 moves again and decides between Option C: Increasing its production 2 more units to 6 units. Option D: Leaving its production at 4 units. The game then ends and the firms receive their profits (payoffs). In all other situations other than that described above, the game ends and the firms earn their profits (payoffs). Question A. Write this game down in extensive form. Question B. Write this game down in normal form.
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.5P
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Transcribed Image Text:QUESTION 1
1. Consider the following game involving a duopoly (a market with only
two firms).
Assume both firms face 0 costs of production. Their payoffs (profits)
are determined by the price p and the amount they produce q, i.e. p
qi where qi is the level of production of firm i.
We'll assume price is given by: P = 12 - q1- q2
In this setting, Firm 1 and Firm 2 move simultaneously, choosing
between
Option A: Produce 4 units
Option B: Produce 0 units
After the firms have made their decision, Firm 1 observes what Firm 2
has done. If Firm 1 and Firm 2 have both selected Option A, Firm 1
moves again and decides between
Option C: Increasing its production 2 more units to 6 units.
Option D: Leaving its production at 4 units.
The game then ends and the firms receive their profits (payoffs).
In all other situations other than that described above, the game ends
and the firms earn their profits (payoffs).
Question A. Write this game down in extensive form.
Question B. Write this game down in normal form.
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