6. CVS Pharmacy makes an output choice (high or low) and then the competitor, OptumRX, decides...

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6. CVS Pharmacy makes an output choice (high or low) and then the competitor, OptumRX, decides whether to enter the market. Profits to CVS from choosing low are 9, 000 if Optum does not enter, and 4, 500 if Optum does enter. Profits to CVS from choosing "high" are 8, 000 if Optum does not enter and 4, 000 if they do. Profits to Optum from not entering at 0 regardless of the action of CVS. Profits to Optum if enters are 1, 250 if CVS chooses 'low' and 0 if CVS chooses high. a. Draw the game tree and find the Subgame Perfect Nash Equilibrium b. Suppose that CVS threatens that it will cut prices to a level that would cause Optum to earn negative profit, and this would change CVS profit to 3500. Should Optum enter the market? c. Suppose that it would change CVS profits to 5000. Should Optum enter the market? 7. Consider the sequential game below. Nodes with a green square denote Player 1 decisions, while nodes with a red circle denote Player 2 decisions. a. How many subgames does this game have? Circle them. b. What is each players SPNE strategy? What is the SPNE outcome? 3 6. CVS Pharmacy makes an output choice (high or low) and then the competitor, OptumRX, decides whether to enter the market. Profits to CVS from choosing low are 9, 000 if Optum does not enter, and 4, 500 if Optum does enter. Profits to CVS from choosing "high" are 8, 000 if Optum does not enter and 4, 000 if they do. Profits to Optum from not entering at 0 regardless of the action of CVS. Profits to Optum if enters are 1, 250 if CVS chooses 'low' and 0 if CVS chooses high. a. Draw the game tree and find the Subgame Perfect Nash Equilibrium b. Suppose that CVS threatens that it will cut prices to a level that would cause Optum to earn negative profit, and this would change CVS profit to 3500. Should Optum enter the market? c. Suppose that it would change CVS profits to 5000. Should Optum enter the market? 7. Consider the sequential game below. Nodes with a green square denote Player 1 decisions, while nodes with a red circle denote Player 2 decisions. a. How many subgames does this game have? Circle them. b. What is each players SPNE strategy? What is the SPNE outcome? 3