b. Now move backward in time one step. Imagine that it is the start of the first
ID: 1107549 • Letter: B
Question
b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to 2a, is the publicly stated policy credible? (Hint: No matter what happens in the a. If X 12, what terminal node will the subgame pe c. Suppose that X-11 and that it is now possible for Fr Nash equilibrium path lead to? Nash Equilibrium path lead to? first game, what will both firms do in the second game) make a side payment of value V to Sally that will her payout at terminal node A from X-11 to X V. What is the minimum amount that V can be such the subgame perfect Nash equilibrium path will le terminal node A? Assume that V can take on discrete units (0, 1,2, 3...). e. Given your answers to 2a and 2b, what strategy will each firm choose in the first game? 3. Examine the following game tree. Fred and Sally are planning on running competing restaurants. Each must decide whether to rent space or buy space. Fred goes first at decision node F Sally goes second at either decision node S, or decision node S, (depending on what Fred chose to do at decision node F. Note that the payoff to Sally at terminal node A is X. L014.6 Rent A (16, X) Rent S, Buy B (8, 12) Rent C (6,6) Buy S2 Buy D (9, 7)Explanation / Answer
a) for X< 12
Using SPNE the terminal node will take the path Buy. As payoff to Sally will be higher under Buy.
b) for X>12,
The terminal node will be Rent when Fred is thinking of rent and buy when fred is looking for buying. Comparing the payoffs for sally.
c) This can happen when 11+V > 12 i.e the payoff from rentin is higher than buy given sally is on node A. This implies V>1.
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