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Page 1 March 19, 2012

Economics 203: Intermediate Microeconomics I Lab Exercise #11

Section 1: Test Your Understanding

The following payoff matrix represents the long-run payoffs for two duopolists faced with the option of buying or leasing buildings to use for production. Determine whether any dominant strategies exist and whether or not there is a Nash eąuilibrium.

		Firm	_
		Lease	Buy
		Building	Building
	Lease	FI = 500	FI = 750
Firm 2		F2 = 500	F2 = 400
	Buy	FI =300	FI = 600
		F2 = 600	F2 = 200

Section 2: Discussion:

What are the fundamental differences among the Cournot, Bertrand, and Stackelberg models of oligopoly?

Section 3: Application

The market demand curve for a pair of Cournot duopolists is given as P=36-3Q, where Q=Qi+Q2- For each duopolists, the constant per unit marginal cost is $ 18/unit and fixed costs are zero.

a)    Find the Cournot eąuilibrium price, ąuantity and profits.

b)    Solve the problem for Bertrand duopolists.

c)    Find the eąuilibrium price, ąuantity and profit for each firm, assuming the firms act as a Stackelberg leader and follower, with Firm 1 as the leader.