Find sum of firms profits in the subgame perfect equilibrium

Assignment Help Macroeconomics

Reference no: EM132142181

Question: Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent. To enter this industry, firm 1 must choose to build either a plant with a small output capacity (S), or large output capacity (L). A plant with small capacity costs $50 to set up; one with large capacity cost $175. In either case, the marginal cost of production is zero. But firm 1 can also opt to stay out (O), in which case it does not incur any type of cost. Firm 2 is able to observe firm 1's decision before deciding whether to expand or not its initial small output capacity operation. Expanding (E) costs firm 2 $87.3, whereas not expanding (N) incurs no cost for the firm. In either case, the marginal cost of production is also zero.

The revenues under the different scenarios are given below.

- If only one small firm exists, its revenue is $80, the other earns zero.

- If two small firms exist, each earns revenue of $70.

- If only one large firm exists, its revenue is $200, the other earns zero.

- If two large firms exist, each earns revenue of $90.

- If one small and one large firm exist, the small firm earns $40, while the large one earns $160.

a) How many pure strategies are available for firm 1?

b) How many pure strategies are available for firm 2?

c) What is the sum of the firms' profits in the subgame perfect equilibrium?

Reference no: EM132142181

Questions Cloud

What effect the respective shift has on the interest rate : Below you find several incidents that are the consequence of shifts in either Money Supply or Money Demand. First, tell me whether the instance is due.

What is the equilibrium value of a share of jones inc today : The required return on the cash flows of Jones' dividends is 14% per year. a) What is the equilibrium value of a share of Jones Inc today?

How many sandwiches do you make : Suppose you are planning a party for 10 friends. You decide to make sandwiches to serve at the party, no more than one sandwich per person.

What is the effective yield to maturity : Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Find sum of firms profits in the subgame perfect equilibrium : Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent. To enter this industry, firm 1 must choose to build either a plant with a small

Show that the given algorithm is a 2-approximation algorithm : Show an example in which the algorithm uses n/2 drives but the optimum file arrangement uses only n/4 + 1.

Develop preliminary prototype of proposed e-commerce website : CIS5101 Management of Business Online - Describe the website structure and the purpose of each element (include snapshots and diagrams where appropriate)

Is the firm making profits or losses : A firm is currently producing 30 units of output. At this level of output produced: Its average total cost is 110 (ATC =110) The market price per unit of output

What does that indicate and how do you fix it : Suppose you are in the process of drawing the DFDs, and you have found that one of your Level 1 DFD describing a process in level 0.

User Account

All Pages