1. For each of the following industry types, indicate (a) whether price is set
above, below, or equal to marginal cost; (b) whether firms earn positive,
negative, or zero profits in long run equilibrium; and (c) whether entry or exit
is free or restricted.
Price vs. Marginal
2. Consider the following Prisoner’s Dilemma problem. Row and column
commit a crime and are arrested. They are placed in separate rooms and
given the choice to either confess to the crime or deny their involvement.
Confess Row: 8 years in jail
Column: 8 years in jail
Row: 1 year in jail
Column: 10 years in jail
Row: 10 years in jail
Column: 1 year in jail
Row: 2 years in jail
Column: 2 years in jail
A. What is the Nash Equilibrium outcome for this game?
3. Consider the following simultaneous, non-cooperative game, where two
competing firms, Column and Row, are trying to decide whether to construct
a large store or a small one. Profits to each firm under each outcome are
ROW Small Row gets $100
Row gets $50
Column gets $105
Large Row gets $105
Column gets $50
Row gets $5
Column gets $5
A. Does either player have a dominant strategy? If so, what is it/are they?
B. Does this game have any Nash equilibria? How many (there may be more than
one)? What is it/are they?
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