Answered: 3. In a Stackelberg game, what do we…

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3. In a Stackelberg game, what do we call the firm that moves first? What do we call the firm that moves second?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

3. In a Stackelberg game, what do we call the firm that moves
first? What do we call the firm that moves second?

Expert Solution

Step 1

Game theory is the game of strategy.

Payoff matrix shows the payoffs of the players.

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3. The following is an interpretation of the rivalry between the United States (USA) and the Soviet Ünion (USSR) during the cold war. Each side has the choice of two strategies: Aggressive and Restrained. The payoff table is given as follows: USSR Restrained Aggressiveness Restrained 4,3 1,4 USA Aggressiveness 3,1 2,2 a) Consider this game when the two countries move simultaneously. Find all pure strategy Nash equilibria. b) Next consider three alternative ways in which the game could be played with sequential moves: (i) The USA moves first and the USSR moves second. (i) the USSR moves first and the USA moves second. (i) The USSR moves first, and the USA moves second, but the USSR has a further move after the USA moves. For each case, draw the game tree and find the subgame-perfect Nash equilibrium. c) What are the key strategic issues (commitment, credibility and so on) for the two countries. (Note: Be concise. Your answer should not exceed 300 words].
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