1. Two oil companies,Company A and Company B,are competing for a contract to supply oil to a large industrial customer. Both companies can choose the amount of oil to supply, and the market demand for oil is represented by the inverse demand function:P=100–Q where P is the price of oil and $Q$ is the total quantity of oil supplied by both companies.

Company A is the leader and makes its decision first, and Company B is the follower and makes its decision second. Both companies have constant marginal costs of $20 per barrel of oil. What is the SPE?

2. An integrated firm sells to consumers directly. The retailer decides its order quantity q.

The market price is determined by the following inverse demand function: p = 100 – q. The firm’s production cost is 10 per unit. What is the Nash equilibrium? What is the profit of the integrated firm?

Answer rating: 100% (QA)

1 Subgame Perfect Equilibrium SPE in a Sequential Game In a sequential game an SPE is a strategy profile where each players strategy is optimal not only for their decision node but also for all subseq... View the full answer