EBK PRINCIPLES OF MACROECONOMICS
7th Edition
ISBN: 8220102749566
Author: Mankiw
Publisher: CENGAGE L
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Chapter 12.3, Problem 3QQ
To determine
Ways of increasing standard of living and its drawback.
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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.)
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?
Answer
M” method
Given the following model, solve by the method of “M”. (see image)
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