I’m working on a micro economics question and need a sample draft to help me learn.
Q. 14.21 Two firms are competing in an oligopolistic industry. Firm 1, the larger of the two
firms, is contemplating its capacity strategy, which could be either “aggressive” or
“passive.” The aggressive strategy involves a large increase in capacity aimed at increasing
the firm’s market share, while the passive strategy involves no change in the firm’s
capacity. Firm 2, the smaller competitor, is also pondering its capacity expansion strategy;
it will also choose between an aggressive strategy and a passive strategy. The following
table shows the profits associated with each pair of choices:
Firm 2
Aggressive Passive
25, 9 33, 10
Firm 1
Aggressive
Passive
30, 13
36, 12
a) (2 marks) If both firms decide their strategies simultaneously, what is the Nash
equilibrium?
b) (3 marks) If Firm 1 could move first and credibly commit to its capacity expansion
strategy, what is its optimal strategy? What will Firm 2 do?
Q2 Consider the following game.
(a) (2 marks) Find all pure-strategy Nash equilibria.
(b) (3 marks) Find all mixed-strategy Nash equilibria.
A
B
с
2,4
6,0
D
5,1
1,9
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