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In: Economics

The following is a simplified duopoly model of competition between two firms. Each firm is restricted...

  1. The following is a simplified duopoly model of competition between two firms. Each firm is restricted to producing 25, 35, 50 or 100 units of output. The details of how the payoffs are derived are unimportant because payoffs are all given in the table below.

                                                                                  FIRM 2

25

35

50

100

25

125, 125

100, 140

63, 125

-63, -250

FIRM 1

35

140, 100

105, 105

53, 75

-123, -350

50

125, 63

75, 53

0, 0

-250, -500

100

-250, -63

-350, -130

-500, -250

-900, -900

  1. Now assume that FIRM 1 is the Stackelberg leader in this market. And FIRM 2 is the follower. Being the leader, FIRM 1 makes the first move in choosing the quantity of output, followed by FIRM 2. Draw the extensive form or the game tree for this sequential form game.
  1. Using the game tree, now determine the sub-game perfect Nash equilibrium(s). Describe the process that helps you in determining it.

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