Measuring Macroeconomic Activity; Spending by Individuals, Firms, and Governments on Real Goods and Services

Topics: Economics, Game theory, Nash equilibrium Pages: 2 (343 words) Published: June 5, 2011
Measuring Macroeconomic Activity; Spending by Individuals, Firms, and Governments on Real Goods and Services

Does either player have a dominant strategy? Explain.
In the payoff matrix above, both drivers must swerve to avoid a head-on collision.  If both swerve to different sides, they will avoid collision.  However, if they choose to swerve the same side, they will collide.   Is there Nash equilibrium in this game? Explain

While driving makes communication difficult (i.e., one driver cannot ask the other which way they will serve); intuition suggests that each driver will swerve away from the other.  There are two pure Nash equilibria: either both swerve right or both swerve left.  Which side the drivers swerve to is irrelevant so long as they both swerve the same direction.  Both outcomes (both swerving right, both swerving left) are pareto efficient. Why this game is called a cooperative game?

The game is cooperative because a successful outcome depends on both players (i.e., drivers).  In short, outcomes depend on the action of both participants so there is no indifference between individual choices; a positive outcome is a function of both players making the same decision. What is a firm's Total Revenue?

Total Revenue = Price x Quantity; or TR = P*Q
What is a firm's Total Cost?
Total Cost = Variable Costs + Fixed Costs; or TC = VC + FC
What is a firm's Total Profits?
Total Profits = Total Revenue - Total Cost; or TP = TR - TC
If a monopolist were to behave like a perfectly competitive firm (operating in the long run), discuss the effect. Long run equilibrium under monopolistic competition means that the firm will produce where marginal costs equal marginal revenue.  As competition increases (i.e., other firms enter the market), the demand curve shifts and the firm is no longer able to sell its goods above the average cost (AC) curve (so there is no profit like there is in short run equilibrium under monopolistic competition).  [pic]...
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