Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Question
Chapter 15, Problem 15.7P
1
To determine
Sub game perfect equilibrium for Stackelberg model.
2
To determine
Value of sunk cost for which firm 1 deter the entry of second firm.
3
To determine
Best response diagram for Cournot, Stackelberg
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Answer:
Suppose that there are only two firms in a market in which demand is given by p = 64 - Q, where Q is the total production of the two firms. Each firm can choose either a low level of output, qL = 15, or a high level of output, qH = 20. The unit cost of production for both firms is $4. Write down the normal-form representation of the game in which the strategic variable for each firm is the quantity of output and the firms make their choices simultaneously. Find the pure strategy Nash equilibrium of this game (quantities produced and market price).
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