Game Theory. 1. Yuppie town has two food stores, LA Boulangerie, which sells bread, and La Fromagerie, which sells cheese. It costs $1 to make a loaf of bread and
1. Yuppie town has two food stores, LA Boulangerie, which sells bread, and La Fromagerie, which
sells cheese. It costs $1 to make a loaf of bread and $2 to make a pound of cheese. If La
Boulangerie's price is P 1 dollars per loaf of bread and La Fromagerie's price is P 2 dollars per pound of
cheese, their respective weekly sales, Q 1 thousand loaves of bread and Q 2 thousand pounds of
cheese, are given by the following equations:
a) For each store, write its profits as a function of P 1 and P 2 , and find the Nash
prices
b) Suppose that the two stores collude and set prices jointly to maximize the sum of their
profits. Find the joint profit-maximizing prices for the stores.
c) Provide an explanation for the differences between the Nash equilibrium prices and those
that maximize joint profits.
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Provide a short intuitive explanation for the differences between the
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is joint profit maximization not a Nash equilibrium?
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