Problem 1
AMD is deciding whether to enter a market of Intel.
If it enters, Intel can decide to fight or accommodate.
The game has the following payoff matrix with profits in $B:
Intel
fight accommodate
AMD
enter −2; 10 10; 13.5
stay out 0; 20 0; 23.5
1 What is the subgame perfect equilibrium of the game?
2 Each production facility Intel costs 2 (reduces its payoff if it fights or
accommodates), but increases Intel’s profit by 1 if it decides to fight.
How many facilities does Intel build (only an integer number allowed)?
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Problem 2
Price elasticity of demand for a flight service between two cities is −2.
There are 4 firms with equal cost functions in a Cournot equilibrium.
What is the ratio of price to marginal costs of these firms?
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Problem 3
Two firms produce an identical product.
The firms have constant marginal costs of $1 and zero fixed costs.
Market demand for this product is q = 6 000 − 1 200p.
Both firms can easily change prices.
A firm charging a lower price sells the entire market quantity.
If they charge equal prices, each firms serves a half of the market.
1 What is the name of the model?
2 What is the Nash equilibrium of this game? Explain.
What are the quantities and profits of the firms?
3 What happens if one of the firms introduces an innovation that
reduces its costs by $0.5?
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