TEXplor has purchased a 2-year lease on land adjacent to the land leased by Clampett. The land leased by TEXplor lies above the same crude oil deposit. Assume EXAMINERS: DR. AGYAPOMAA GYEKE-DAKO, DR. AMIN KARIMU AND DR. WILLIAM BEKOE PAGE 3 of 4 each company sinks wells of the same size at the same time. If both companies sink wide wells, each will extract 2 million barrels in 6 months, but each company will receive profit of only GHC 1 million. On the other if each company sinks a narrow well, it will take a year for Clampett and TEXplor to extract their respective shares, but their profits will be GHC14 million apiece. Finally, if one company drills a wide well while the other company drills a narrow well, the first company will extract 3 million barrels and the second company will extract only 1 million barrels. In this case, the first company will earn profits of GHC 16 million and the second company will actually lose GHC 1million. 1. Illustrate this using a normal form game. 2. Does either firm have a strictly dominant strategy? If yes, what is (are) these strategies? Explain your answer. 3. What strategy will each firm adopt? Explain your answer. 4. Does this game have a Nash equilibrium? Explain your answer 5. Is collusion possible in this game? Explain your answer.
TEXplor has purchased a 2-year lease on land adjacent to the land leased by Clampett. The land leased by TEXplor lies above the same crude oil deposit. Assume
EXAMINERS: DR. AGYAPOMAA GYEKE-DAKO, DR. AMIN KARIMU AND DR. WILLIAM BEKOE
PAGE 3 of 4
each company sinks wells of the same size at the same time. If both companies sink wide wells, each will extract 2 million barrels in 6 months, but each company will receive profit of only GHC 1 million. On the other if each company sinks a narrow well, it will take a year for Clampett and TEXplor to extract their respective shares, but their profits will be GHC14 million apiece. Finally, if one company drills a wide well while the other company drills a narrow well, the first company will extract 3 million barrels and the second company will extract only 1 million barrels. In this case, the first company will earn profits of GHC 16 million and the second company will actually lose GHC 1million.
1. Illustrate this using a normal form game.
2. Does either firm have a strictly dominant strategy? If yes, what is (are) these strategies? Explain your answer.
3. What strategy will each firm adopt? Explain your answer.
4. Does this game have a Nash equilibrium? Explain your answer
5. Is collusion possible in this game? Explain your answer.
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