Java Python EC992-7-SP
ADVANCED MICROECONOMICS
POSTGRADUATE EXAMINATIONS 2022–2023
1. Answer both parts (a) and (b) of this question.
(a) [25 marks] Consider the following sequential-move game. The market demand for an industry is P(Q) = max{A − Q,0}, where Q denotes total output in the industry and A > 0. There are two firms. Firm 1 is the incumbent currently monopolising the industry. Firm 2 is a potential entrant. The cost of entry for firm 2 is f > 0. If firm 2 chooses to enter, then the firms compete in quantities (Cournot duopoly). If firm 2 choose to stay out, then firm 1 continues as a monopolist while firm 2 gets zero profit. The cost to firm i of producing qi ≥ 0 is cqi, where 0 < c < A.
(i) Under what conditions on f,A,c does there exist a unique subgame perfect Nash equilibrium in which firm 2 enters? Explain and provide the strategies for each firm if such an equilibrium exists.
(ii) Under what conditions on f,A,cdo there exist two subgame perfect Nashequilibria of this game: one in which firm 2 enters and one in which firm 2 stays out? Explain and provide the strategies for each firmin each equilibrium if these exist.
(b) [25 marks] Consider the following simultaneous-move game of incomplete information. There are N ≥ 3 players. The action set for each player is {A, B}. Player n has cost 0 from choosing A and cost cn from choosing action B. The value of cn is known only to player n. If at least two players choose B, then the payoff v > 0 is obtained by all players, else all players obtain 0. More precisely, for any action profile a = (a1 , a2 ,..., aN ), the payoff to player n is as follows.
(1)
Suppose the players believe that {cn}n(N)=1 are identically and independently distributed
according to the uniform distribution over [0, v].
(i) Does there exist a Bayes-Nash equilibrium of this game in which each player always chooses A? Explain your answer.
(ii) Does there exist a symmetric Bayes-Nash equilibrium of this game in which each player uses the following strategy? Let ¯(c) ∈ [0, v]. Player n chooses B if cn < ¯(c) and chooses A otherwise. Explain your answer and provide an expression for ¯(c) if such an equilibrium exists.
2. Answer both parts (a) and (b) of this question.
A labour union W and a firm F interact in order to determine the amount of labour provided to the firm and payment from the firm to the labour. If ℓ ≥ 0 labour is provided to F and payment tis obtained, then W’s utility is UW(ℓ,t) = uW (t) − ℓ, where uW(′)(·) > 0, uW(′′)(·) < 0 and F’s utility is UF((ℓ,t;θ) = θuF (ℓ) − t where uF(′)(·) > 0, uF(′′)(·) < 0 and θ ∈ {θ1 ,θ2 } , θ 1 > θ2 > 0 is a productivity parameter.
W has all the bargaining power and makes take-it or leave-it offers to F, each offer specifying a&nb EC992 ADVANCED MICROECONOMICS POSTGRADUATE EXAMINATIONS 2022–2023 sp;labour amount ℓ and a payment t. W’s and F’s objective respectively to maximise their own expected utility. IfF does not accept any offer then F’s utility and W’s utility is 0.
Contracting takes place ex-ante, that is F must decide on W’s offers before F knows the value of θ . F believes θ = θ 1 with probability π ∈ (0, 1).
(a) [25 marks] Suppose W knows the value of θ at the time of making offers.
(i) State and explain the optimisation problem for W, including any constraints that W faces, to make an offer to F for each value of θ .
(ii) Characterise W’s optimal offers denoted (ℓ* (θ), t* (θ)),θ ∈ {θ1 ,θ2 }.
(b) [25 marks] Suppose W does not know the value of θ at the time of making offers, but believes it is θ1 with probability π ∈ (0, 1).
(i) State and explain the optimisation problem for W, including any constraints that W faces, to make an offer to F for each value of θ .
(ii) Do the (ℓ* (θ), t* (θ)),θ ∈ {θ1 ,θ2 } solve W’s problem? Explain.
(iii) Characterise W’s optimal offers denoted (ℓ(ˆ)(θ), t(ˆ)(θ)),θ ∈ {θ1 ,θ2 }.
3. Answer both parts (a) and (b) of this question.
Suppose a manufacturer M supplies, at constant marginal cost k > 0, a commodity to a retailer R who then sells it on the final market. The demand function D(p) in the final market can be D(¯)(p) (high demand) with probability π(e) ∈ (0, 1) or D (p) (low demand) with probability 1 − π(e), where e ∈ {0, 1} denotes the effort made by R, p denotes the price for the good in final market, and D(¯)(p) > D (p) > 0 for all p > 0, with D(¯)′ (·) < 0 and D′ (·) < 0. Suppose that 0 < π(0) < π(1) < 1 and that the cost of effort to R isc(e) = e.
Both M and R can observe the demand function which is realised after R chooses effort. M has all the bargaining power and makes take-it or leave-it offers to R. An offer specifies the final market price (p) and the payment t from M to R for each level of the demand function:
(¯(p), t(¯)) if the demand function is D(¯)(·) and (p, t) if the demand function is D (·).
If R does not accept M’s offer, then the utility to M and R is 0 each. If R accepts M’s offer, then the utility to M from (p,t) under demand function D(·) is (p−k)D(p) −t and the utility to R from payment t and effort e is u(t) − c(e) where u′ > 0, u′′ < 0, and u(0) = 0. The objective of M and R respectively is to maximize their own expected utility.
(a) [25 marks] Suppose M can observe the effort chosen by R and M wants R to choose e = 1.
(i) State and explain M’s optimisation problem including any constraints. (ii) Solve for the offer (¯(p)F , t(¯)F ), (pF , tF ) which solves M’s problem.
(b) [25 marks] Suppose M can not observe the effort chosen by R and M wants R to choose e = 1.
(i) State and explain M’s optimisation problem including any constraints. (ii) Solve for the offer (¯(p)* , t(¯)* ), (p* , t* ) which solves M’s problem.
(iii) Are (¯(p)* , p* ) higher or lower than (¯(p)F , pF )? Explain