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FMIC Assignment

The document contains solutions to a problem set on microeconomics, focusing on static 2x2 games, the tragedy of the commons, and Cournot duopoly with asymmetric production costs. It includes derivations of best response correspondences, identification of Nash equilibria, and discussions on social optimal outcomes. Each problem is systematically addressed with specific strategies and outcomes for the players involved.

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13 views9 pages

FMIC Assignment

The document contains solutions to a problem set on microeconomics, focusing on static 2x2 games, the tragedy of the commons, and Cournot duopoly with asymmetric production costs. It includes derivations of best response correspondences, identification of Nash equilibria, and discussions on social optimal outcomes. Each problem is systematically addressed with specific strategies and outcomes for the players involved.

Uploaded by

trungmaxnguyen3010
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Prof. Dr.

Ferdinand von Siemens WS 2024/2025


Zhuokun Liu

Fundamentals of Microeconomics
Problem Set 4 – Solutions

Problem 1: Static 2x2 Games

Consider the following static 2x2-Games. Derive the best response correspondences
and state all Nash equilibria.

a.
Player 2
L R
Player 1 T 2, 2 0, 15*
B 15,* 0 10,* 10*

B and R are strictly dominant strategy

NE: s = (B,R)

b.
Player 2
L C R
T 0, 0 *
10, 15 10,* 10
Player 1 M 15,* 0 0, 10 5, 15*
B 10, 5 15,* 10* 0, 5

1: L is strictly dominated by C strategy


2: M is strictly dominated by strategy T/a mixed strategy of T&B
3: R is strictly dominated by M
4: T is strictly dominated by B

NE: s = (B,C)
Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

c.
Player 2
L R
Player 1 T 2, 2
* * 1, 0
B 0, 1 3,* 3*

NE1: s = (T, L); NE2: s = (B, R)


Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

d.
Player 2
L R
Player 1 T 1, −1 −1, 1
B −1, 1 1, −1
Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

Problem 2: The Tragedy of the Commons

The tragedy of the commons refers to the conflict over scarce resources that results from
the tension between individual selfish interests and the common good.

Imagine that there are N players, say firms, in the world, each choosing how much to
produce. Their production activity in turn consumes some of the clean air that surrounds
our planet. There is a total amount of clean air equal to K, and any consumption of clean
air comes out of this common resource. Each player i chooses his own consumption of
clean air for production, 𝑘 ≥ 0 , and the amount of clean air left is therefore
𝐾 − ∑ 𝑘 . The benefit of consuming an amount 𝑘 ≥ 0 gives player i a benefit
equal to ln(𝑘 ), and no other player benefits from i’s choice. Each player also enjoys
consuming the remainder of the clean air, giving each a benefit ln(𝐾 − ∑ 𝑘 ).

a. Find the best-response correspondences for each player in this game.


Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

For the remaining of the analysis, assume that there are only 2 players.

b. Find the Nash equilibrium of this game.


Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

c. Find the socially optimal outcome in this game.


Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

Problem 3: Cournot Duopoly with Asymmetric Production Costs

Consider an asymmetric game of Cournot duopoly in which the two operating firms
differ in their production costs. Firm 1 chooses its quantity 𝑞 at costs 𝑐 (𝑞 ) = 4𝑞 .
Firm 2 chooses its quantity 𝑞 at costs 𝑐 (𝑞 ) = 2𝑞 . The market price is given by
𝑃(𝑞 , 𝑞 ) = 12 − 𝑞 − 𝑞 .
Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

a. Determine the best response correspondences 𝑞 (𝑞 ) and 𝑞 (𝑞 ).

b. Determine the Nash equilibrium of this game.


Prof. Dr. Ferdinand von Siemens WS 2024/2025
Zhuokun Liu

c. Determine the equilibrium price and the firms’ equilibrium profits.

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