1.Draw the extensive form representation of this game.2. Find a subgame perfect equilibrium (SPE) of this game. focus on pure-strategies only. Stage 1.– Firms 1 and 2 simultaneously choose how much to spend on advertising.Let a, and az denote the advertising levels of firms 1 and 2, respectively. Supposethat advertising costs are 2. q? for firm 1, and 2. g? for firm 2.Stage 2.– Having observed a, and a2, both firms play a simultaneous Cournot-quantity competition game. The market price is given by the equationp = 20 + dj + az – q1 – 92.Assume that production costs are c(gi) = 5 · gi for i = 1, 2.

Given,In the first stage,In the second stage,

Answered: 1.Draw the extensive form…

1.Draw the extensive form representation of this game. 2. Find a subgame perfect equilibrium (SPE) of this game. focus on pure-strategies only.

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

1.Draw the extensive form representation of this game.

2. Find a subgame perfect equilibrium (SPE) of this game. focus on pure-strategies only.

Stage 1.– Firms 1 and 2 simultaneously choose how much to spend on advertising.
Let a, and az denote the advertising levels of firms 1 and 2, respectively. Suppose
that advertising costs are 2. q? for firm 1, and 2. g? for firm 2.
Stage 2.– Having observed a, and a2, both firms play a simultaneous Cournot-
quantity competition game. The market price is given by the equation
p = 20 + dj + az – q1 – 92.
Assume that production costs are c(gi) = 5 · gi for i = 1, 2.

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Step 2: Draw the extensive form representation of this game

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Step 3: Solve the Cournot competition in Stage 2

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Step 4: Find Subgame perfect equilibrium

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