The U.S. government has decided to build a new off ramp for Interstate 5 in California. Exxon and Shell are both interested in building a gas station near the new off ramp. They can build the gas station near the off ramp for northbound traffic or they could build the gas station near the off ramp for southbound traffic. The profits for each outcome are illustrated in the accompanying payoff table: Shell northbound Shell southbound Exxon northbound Exxon receives $60,000 profit Shell receives $50,000 profit Exxon receives $110,000 profit Shell receives $100,000 profit Exxon southbound Exxon receives $80,000 profit Shell receives $120,000 profit Exxon receives $50,000 profit Shell receives $50,000 profit a. Select the Nash equilibrium, or equilibria, that occur if Exxon and Shell make these decisions simultaneously. Exxon builds northbound and Shell builds northbound. Exxon builds southbound and Shell builds northbound. Exxon builds southbound and Shell builds southbound. Exxon builds northbound and Shell builds southbound. b. Use the information in the payoff table to create a game tree for this sequential move game. This part is not graded, but you will need to make the game tree on your own to answer the following questions. c. The Nash equilibrium for the sequential move game where Exxon moves first is that Exxon builds southbound /northbound and Shell builds southbound /northbound

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The U.S. government has decided to build a new off ramp for Interstate 5 in California. Exxon and Shell are both interested in building a gas station near the new off ramp. They can build the gas station near the off ramp for northbound traffic or they could build the gas station near the off ramp for southbound traffic. The profits for each outcome are illustrated in the accompanying payoff table:

	Shell northbound	Shell southbound
Exxon northbound	Exxon receives $60,000 profit Shell receives $50,000 profit	Exxon receives $110,000 profit Shell receives $100,000 profit
Exxon southbound	Exxon receives $80,000 profit Shell receives $120,000 profit	Exxon receives $50,000 profit Shell receives $50,000 profit

a. Select the Nash equilibrium, or equilibria, that occur if Exxon and Shell make these decisions simultaneously.

Exxon builds northbound and Shell builds northbound.

Exxon builds southbound and Shell builds northbound.

Exxon builds southbound and Shell builds southbound.

Exxon builds northbound and Shell builds southbound.

b. Use the information in the payoff table to create a game tree for this sequential move game. This part is not graded, but you will need to make the game tree on your own to answer the following questions.

c. The Nash equilibrium for the sequential move game where Exxon moves first is that Exxon builds

southbound /northbound and Shell builds southbound /northbound

Now suppose that Shell moves first and builds a gas station before Exxon.

d. The Nash equilibrium for the sequential move game where Shell moves first is that Shell builds

southbound /northbound and Exxon southbound /northbound

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