Two neighboring homeowners, i = 1, 2, simultaneously choose how many hours l, to spend maintaining a beautiful lawn. The average benefit per hour is 10 – 1, + 2' and the (opportunity) cost per hour for each is 4. Home- owner i's average benefit is increasing in the hours neighbor j spends on his own lawn because the appearance of one's property depends in part on the beauty of the surrounding neighborhood. a. Compute the Nash equilibrium. b. Graph the best-response functions and indicate the Nash equilibrium on the graph. c. On the graph, show how the equilibrium would change if the intercept of one of the neighbor's average benefit functions fell from 10 to some smaller number.

Two neighboring homeowners, i = 1, 2, simultaneously choose how many hours l, to spend maintaining a beautiful lawn. The average benefit per hour is 10 – 1, + 2' and the (opportunity) cost per hour for each is 4. Home- owner i's average benefit is increasing in the hours neighbor j spends on his own lawn because the appearance of one's property depends in part on the beauty of the surrounding neighborhood. a. Compute the Nash equilibrium. b. Graph the best-response functions and indicate the Nash equilibrium on the graph. c. On the graph, show how the equilibrium would change if the intercept of one of the neighbor's average benefit functions fell from 10 to some smaller number.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: Frontiers Of Microeconomics

Section: Chapter Questions

Problem 9PA

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