QUESTIONS 1 Consider the following pay-off matrixes for the 2 In each of the gam
ID: 1130990 • Letter: Q
Question
QUESTIONS 1 Consider the following pay-off matrixes for the 2 In each of the games set out in Question 1, would the outcome be likely to change if the game were repeated? interaction of two firms, A and X. They each have an aggressive or a passive strategy that they could adopt. aggressive or a passive strategy that they could adopt. In monopolistic competition, which one of the following is true. In monopolistic competition, which one of the follow ng The first pay-off in each pair is for A and the second is for X. In each case attempt to identify: a) the dominant strategy for each player b) the Nash equilibrium c) the cooperative equilibrium. a) The outcome is the same as in perfect competition in the long run. b) Each producer faces a downward sloping demand curve, sets MC- MR and makes no profit in the long run c) Each producer sets marginal cost equal to price. d) Each producer sets MC equal to price in the long run Firm Xchoice Aggressive Passive Firm A choice Aggressive 100, 100 150, 50 175, 175 but not in the short run. e) Each firm in the industry produces where its marginal Passive 50, 150 cost is negative. Explain the short-run equilibrium condition for a firm under monopolistic competition. If this is characterized by the existence of pure profit, what will happen to bring about the long-run equilibrium of the industry? Give examples of barriers to entry and explain why existing firms can benefit from the creation of such barriers. What is a Nash equilibrium and why is it self-policing? Firm X choice Aggressive Passive 100,75160, 60 50, 60 110, 80 Firm A choice Aggressive Passive Firm X choice (z/Why do you think that non-price competition is an Aggressive Passive Firm A choice Aggressive 250, 110 320, 120 130, 160300, 240 important factor where there is a small group of interacting competitors? PassiveExplanation / Answer
1. (i) (a) In this case there is no dominant strategy for each player.Because when player A adopts AGGRESSIVE choice then , player X has more pay-off in adopting AGGRESSIVE and when player A adopts PASSIVE choice then player X has more pay-off in adopting PASSIVE . Therefore, there is no dominant strategy for player X.
Similarly for player A , when player X adopts AGGRESSIVE then player A has more pay-off in adopting AGGRESSIVE and when player X adopts PASSIVE choice then player A has more pay off in adopting PASSIVE. Therefore, there is no dominant strategy for player A also.
(b) Nash equilibrium = (AGGRESSIVE, AGGRESSIVE) and (PASSIVE, PASSIVE) . From part (a) information we can get the nash equilibrium.
(c) Cooperative equilibrium is the same as the nash equilibrium i.e (AGGRESSIVE , AGGRESSIVE) and (PASSIVE,PASSIVE).
(ii) (a) In this player A has the dominant strategy of adopting AGGRESSIVE choice but player X doesn't has any dominant strategy .
Because when player X adopts AGGRESSIVE choice then player A has more pay-off in adopting AGGRESSIVE and when Player X adopts PASSIVE choice then playerA has more pay-off in adopting AGGRESSIVE choice. Therefore, player A has the dominant strategy in adopting AGGRESSIVE. But in case of player X , when player A adopts AGGRESSIVE choice then player X has more pay-off in adopting AGGRESSIVE and when player A adopts PASSIVE choice then playerX has more pay-off in adopting PASSIVE choice. Therefore, player X doesn't has nay dominant startegy.
(b) Nash equilibrium = (AGGRESSIVE, AGGRESSIVE) . Nash equilibrium we got from the part(a) information where both player has more pay-off.
(c) Cooperatuve equilibrium is the same as th nash equilibrium = (AGGRESSIVE, AGGRESSIVE).
(iii) (a) Now, in this case Player A and Player X both have the dominant strategy. Player A has the dominant strategy in adopting AGGRESSIVE and player X has the dominant strategy in adopting PASSIVE.
When player A adopts AGGRESSIVE then player X has more pay off in adopting PASSIVE. And when player A adopts PASSIVE then also Player X has more pay-off in adopting PASSIVE. Therefore, player X has the dominant strategy in adopting PASSIVE choice.
Similarly, for player A , when player X adopts AGGRESSIVE choice, then player A has more pay-off in adopting AGGRESSIVE choice and when player X adopts PASSIVE then also layer A has more pay-off in adopting AGGRESSIVE choice. Therefore, player A has the dominant startegy in adopting AGGRESSIVE choice.
(b) Nash Equilibrium = (AGGRESSIVE, PASSIVE) . This we can see from the part(a) information.
(c) Cooperative equilibrium is the same as nash equilibrium = (AGGRESSIVE, PASSIVE).