Economics Homework Solutions
Problem
#20542

nash equilibrium

Solve and explain
5. You are considering entering a market serviced by a monopolist.  You currently earn $0 economic profits, while the monopolist earns $5.  If you enter the market and the monopolist engages in a price war, you will lose $5 and the monopolist will earn $1.  If the monopolist doesn't engage in a price war, you will each earn profits of $2.

a. Write out the extensive form of the above game.
b. There are two Nash equilibria for the game.  What are they?
c. Is there a subgame perfect equilibrium?  Explain.
d. If you were the potential entrant, would you enter?  Explain why or why not.


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