Question 1- Coordination Game There are two firms whose factories sit alongside a lake. It costs each firm $1,800 to install filters to avoid polluting the lake. Because both firms use the lake's water to produce goods, a polluted lake hurts their production process and increases their costs. Assume that the cost to each firm of a polluted lake is $1,200 times the number of polluting firms. a) Fill in the payoff matrix below based on the above information. Firm 1 Pollute Use Filter Pollute Firm 2 b) What is the pure strategy Nash Equilibrium of the game? Use Filter c) In the extensive form of the game, with Firm 1 choosing first, is the Nash Equilibrium different? Explain.

Question 1- Coordination Game There are two firms whose factories sit alongside a lake. It costs each firm $1,800 to install filters to avoid polluting the lake. Because both firms use the lake's water to produce goods, a polluted lake hurts their production process and increases their costs. Assume that the cost to each firm of a polluted lake is $1,200 times the number of polluting firms. a) Fill in the payoff matrix below based on the above information. Firm 1 Pollute Use Filter Pollute Firm 2 b) What is the pure strategy Nash Equilibrium of the game? Use Filter c) In the extensive form of the game, with Firm 1 choosing first, is the Nash Equilibrium different? Explain.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.8P

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