Explanation Option (a): Figure 1 Figure 1 is the extensive form representation of the leader follower game. By backward induction let’s first examine the sub games in Figure 1. Consider first the sub game that begins at decision node F 1 . There, the leader firm will want to choose to produce 7,000 cars per year because $150 million profit because then leader would obtain from doing so which is far greater than $100 million profit and would obtain if he chose to produce 12,000 cars per year. Next consider the sub game that begins at decision node F 2 . There the leader firm will want to produce 7,000 cars per year rather than 5,000 cars per year because the former will generate a profit of $200 million per year which is double the profit obtained than by producing 5000 cars ($100 million per year). The follower firm can now take into account at decision node L how the leader firm will behave if the game ends up at either decision node F 1 or decision node F 2 . If the follower firm chooses to produce 5,000 cars per year at decision node L, the leader firm will choose to produce 7,000 cars at decision node F 1 thereby leading to terminal node A and a payoff of $210 million for the follower firm. By contrast, if the follower firm chooses to produce 10,000 cars per year at decision node L, the leader firm will choose to produce 7,000 cars per year at decision node F 2 , thereby leading to terminal node D and a payoff of $140 million for the follower firm. The follower firm can see that it would be better off ending up at terminal node A rather than at terminal node D...

Nash equilibrium.

ECO 2010 INCLUSIVE ACCESS

21st Edition

ISBN: 9781260564624

Author: McConnell

Publisher: MCGRAW-HILL HIGHER EDUCATION

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Chapter 14, Problem 10RQ

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Nash equilibrium.

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Recent research indicates potential health benefits associated with coffee consumption, including a potential reduction in the incidence of liver disease. Simultaneously, new technology is being applied to coffee bean harvesting, leading to cost reductions in coffee production. How will these developmentsaffect the demand and supply of coffee? How will the equilibrium price and quantity of coffee change? Use both words and graphs to explain.
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