Name #1 ______________________________ UBIT #1 _____________________________ MGE 302 Assignment #5 - Due Wednesday, November 29 @ 8: Remember, only...

1. Two men's clothing stores that compete for most of the market in a small town in Ohio must choose their average price levels simultaneously. The following payoff table facing the two firms, Arbuckle & Son and Baldwin Apparel, shows the weekly profit outcomes for the various price level combinations. Baldwin Apparel Low Price High Price Low Arbuckle & Sons High $9,000 , $6,000 $7,000 , $4,000 $8,000 , $9,000 $10,000 , $8,000 a. Does Arbuckle & Sons have a dominant strategy? If so, what is it? b. Does Baldwin Apparel have a dominant strategy? If so, what is it? c. Does Arbuckle & Sons have a dominated strategy? If so, what is it? d. Does Baldwin Apparel have a dominated strategy? If so, what is it? e. What is the Nash (strategically stable) equilibrium? Now, suppose that the two clothing stores choose their pricing sequentially (for example, one store waits to see its competitor's pricing before setting its own prices). Using the payoff table on the previous page, complete the two sequential game trees below. In the first game, let Arbuckle & Sons move first and in the second game, let Baldwin move first. Solve both games using the roll-back method and clearly mark the solution path on the game tree. f. Which of the stores (or neither or both) has a first-mover advantage? Which has a secondmover advantage? g. Can you predict which store is likely to go first in this sequential decision? Explain. 1. When participants in a game choose to take actions that result in a Nash equilibrium, a. no single participant has an incentive to change its action. b. each participant has chosen the best action possible, given what the others have chosen. c. no other set of actions could make ALL participants better off. d. both a and b e. all of the above Questions 3 - 4 refer to the following figure showing the reaction functions of oligopoly firms A and B. 2. 3. If firm B expects firm A will run 2 ads, then firm B should run _____ ads in order to maximize its own profit. a. 1 b. 3 c. 5 d. 6 e. 7 3. In Nash equilibrium, a. firm A runs 4 ads and firm B runs 7 ads. b. firm A runs 7 ads and firm B runs 4 ads. c. firm A runs 2 ads and firm B runs 2 ads. d. firm A runs 3 ads and firm B runs 5 ads. e. none of the above.