ECON 444 Homework 4 Problem Set 4 Answers

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ECON 444 Homework 4 Problem Set 4 Answers (Penn State University) Problem 1. (True/False). For each statement, assert whether it is true of false and explain your answer. In a one shot sequential move... pure Betrand game with two identical firms, there can be more than one subgame perfect Nash equilibrium. In a Cournot-Stackelberg game with identical firms, the equilibrium price is invariant to which firms moves first. In a Bertrand-Stackelberg game, the follower firm has a second mover advantage because prices are strategic substitutes. 4. It is possible to support a collusive outcome in a finitely repeated simultaneous Bertrand game. Problem 2. Two Sandwich shops, Early Sandwich (ES) and Best Sandwich (BS), sell identical sandwiches and are located side-by-side in State College. Every morning, ES opens at 8am and advertises its sandwich price pES on a billboard outside the store. BS opens at 9am, observes ES’s daily price, and advertises its daily prices pBS on its store’s window. BS faces a unit cost of 4 while ES faces a unit cost of 3 for making a sandwich. The market (inverse) demand for sandwiches is P = 60-Q. Problem 3. Two independent ice cream vendors own stands at either end of a 2 mile long beach. Everyday there are 200 beach-goers who come to the beach and distribute themselves uniformly along the water. Every beach-goer wants exactly one ice cream during the day, and values the ice cream from both stands at $10. All of the beach-goers would rather be sunbathing or in the water, so they have a disutility to walking on the beach of $1 per mile. Early’s Ice Cream, the firm at location 0, is an early riser and always posts his price first. Cali Creamery, at location 2, is more laid back and posts her price just before the beach opens (the beach requires all prices be posted by the time the beach opens). Both firms have a marginal cost of $1. Problem 4. First Bank of SC (FBSC), Second Bank of SC (SBSC), and Third Bank of SC (TBSC) open branches in State College. As their names suggest, FBSC opens branches first, SBSC second after having observed FBSC’s branches, and TBSC opens branches last. The cost of opening a branch is the same for all three banks at c = $3 Million. The total revenue each bank can earn from each of its branches, also in millions of dollars, is given by P = 43 − Q. [Show More]

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