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Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve. (Hint: Show that learning by doing lowers its cost in the second period.) Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash equilibrium? A. The game does not have a Nash equilibrium. B. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to enter regardless of whether the incumbent prices above marginal cost. ○ C. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to not enter regardless of whether the incumbent prices above marginal cost. D. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to only enter if the incumbent prices above marginal cost. E. The Nash equilibrium is for the incumbent to price above marginal cost and for the rival to only enter if the incumbent prices above marginal cost. Below MC Incumbent Above MC Enter - (500,- 100) Rival ·(600,0) Don't enter Enter (400,400) Rival -(800,0) Don't enter

Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve. (Hint: Show that learning by doing lowers its cost in the second period.) Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash equilibrium? A. The game does not have a Nash equilibrium. B. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to enter regardless of whether the incumbent prices above marginal cost. ○ C. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to not enter regardless of whether the incumbent prices above marginal cost. D. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to only enter if the incumbent prices above marginal cost. E. The Nash equilibrium is for the incumbent to price above marginal cost and for the rival to only enter if the incumbent prices above marginal cost. Below MC Incumbent Above MC Enter - (500,- 100) Rival ·(600,0) Don't enter Enter (400,400) Rival -(800,0) Don't enter

Exploring Economics
Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter15: Oligopoly And Strategic Behavior
Section: Chapter Questions
Problem 17P
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Question
Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve.  
​(Hint​:
Show that learning by doing lowers its cost in the second​ period.)
Part 2
Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash​ equilibrium?
 
Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve. (Hint: Show that learning by doing lowers its cost in the second period.) Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash equilibrium? A. The game does not have a Nash equilibrium. B. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to enter regardless of whether the incumbent prices above marginal cost. ○ C. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to not enter regardless of whether the incumbent prices above marginal cost. D. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to only enter if the incumbent prices above marginal cost. E. The Nash equilibrium is for the incumbent to price above marginal cost and for the rival to only enter if the incumbent prices above marginal cost. Below MC Incumbent Above MC Enter - (500,- 100) Rival ·(600,0) Don't enter Enter (400,400) Rival -(800,0) Don't enter
Transcribed Image Text:Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve. (Hint: Show that learning by doing lowers its cost in the second period.) Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash equilibrium? A. The game does not have a Nash equilibrium. B. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to enter regardless of whether the incumbent prices above marginal cost. ○ C. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to not enter regardless of whether the incumbent prices above marginal cost. D. The Nash equilibrium is for the incumbent to price below marginal cost and for the rival to only enter if the incumbent prices above marginal cost. E. The Nash equilibrium is for the incumbent to price above marginal cost and for the rival to only enter if the incumbent prices above marginal cost. Below MC Incumbent Above MC Enter - (500,- 100) Rival ·(600,0) Don't enter Enter (400,400) Rival -(800,0) Don't enter
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