Problem 1

An old lady is looking for help crossing the street.1Only one person is
needed to help her; more are okay but no better that one. Sunny and
Simran are the two people in the vicinity who can help; each has to choose
simultaneously whether to do so. Each of the two will get utility worth 3
from the old lady’s success (no matter who helps her). But each one who
goes to help will bear a cost of 1, this being the utility value of the person’s
time taken up in helping. Set this up as a game. Write the payoff table, and
find all pure-strategy Nash equilibria.
Solution: The payoff matrix is below. Best-response analysis shows there are two pure-
strategy Nash equilibria:

(Help, Not Help) with payoffs (2, 3) to (Sunny, Simran) and (Not Help, Help) with
payoffs (3, 2).

Simran

Help Not Help

Help 2, 2 2, 3

Sunny Not Help 3, 2 0, 0

Problem 2
Having muscled out the other bhelpuri vendors on Chowpatty Beach in
Bombay, the proprietors of Royal Bhelpuri and Modern Bhelpuri have to
decide where to locate their stalls. Customers are situated uniformly along
the beach, and will purchase from the vendor closest to them.
a) If the beach is 1 km long, what are the Nash equilibrium locations for Royal and
Modern?
Since there are two vendors Royal Bhelpuri and Modern bhelpuri Nash equilibrium
location will be 0.5km for each.

b) If a new entrant, Tasty Bhelpuri, enters the market, what are the equilibrium
locations?
As new variant enters the market there will be no Nash equilibrium as each entities
will deviate based on the incentives gained.
Problem 4
Consider a Cournot duopoly in which the two firms have different
marginal costs. The inverse demand in the market is P(Q) = 15 –Q. The
costs of firm A and firm B are CA(qA) = 6qA and CB(qB) = 3qB, respectively.
a) What is the best response (or reaction) function of firm A?
Soln : Given the inverse demand equation as
P(Q)= 15 - Q
Q = q A + qB
P(Q) = 15 - (qA + qB)
P(Q) = 15 – qA – qB
Now to calculate total revenue we know TR = P * Q
TRA= (15 – qA – qB) * qB
= 15q – qA2 – qAqB
MRA= dTRA / dqA
= 15 – 2qA – qB
C(qA)= 6 qA
MCA= dTCA / dqA = 6
We know that MR = MC
Then 15 – 2qA –qB= 6
2qA = 9 – qB
qA = 9 – qB / 2
qA= 4.5 – 0.5 qB

b) What is the best response (or reaction) function of firm B?

Soln : Given the inverse demand equation as
P(Q)= 15 - Q
Q = q A + qB
P(Q) = 15 - (qA + qB)
P(Q) = 15 – qA – qB
Now to calculate total revenue we know TR = P * Q
 TRB= (15 – qA – qB) * qB
= 15qB – qB2 – qAqB
MRB= dTR / dqB
= 15 – 2qB– qA
CA(qB)= 3 qB
MCB= dTCB/ dqB = 3
We know that MR = MC
Then 15 – 2qB–qA= 3
2qB = 12 – qA
qB = 12– qA / 2
qB= 6 – 0.5 qA

c) What are the equilibrium quantities produced by each firm?

qA= 4.5 – 0.5 qB
qb = 6 – 0.5 qA
Substitute the value of qB in qA
qA = 4.5 – 0.5 qB
qA = 4.5 – 0.5 (6 – 0.5 qA)
= 4.5 – 3 – 0.25 qA
= 1.5/0.75 = 2
qB = 6 – 0.5 qA
= 6 – 0.5(2) = 5
To calculate Q = qA + qB
=5+2=7

d) What is the market price?

To calculate market price P(Q) = 15- Q
P(Q) = 15 - 7 = 8
e) What are the profits of each firm?
Profit (A) = TR – TC
= P * qA – C (A)
=8*2–6*2=4
Profit (B) = TR – TC
= P * qB – C (B)
= 8 * 5 – 3 * 5 = 25