What is the difference between a cooperative and a non-cooperative game?

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A non-cooperative game the players communicate informally with a goal to coordinate their action. It’s important to note they are aware other players existence but independently. The main difference between cooperative and a non-cooperative game is the binding contract. This defines the agreement between the parties, which they must adhere. An example of a cooperative game would be the OPEC or a joint venture. An example of non-cooperative game would a rash for patent on an innovation in the research and development arena.

Explain the meaning of Nash equilibrium. How does it differ from equilibrium in dominant strategies?

Nash equilibrium is where the outcome where players believe that they are doing their best, with regards that other players action. The equilibrium is attained when none of the players has the incentive to change his or her choice, unless they is change by the other players. The feature that distinguishes the Nash equilibrium from equilibrium in dominant strategies is the dependence on the opponent’s behaviour. Therefore, in the dominant strategies the equilibrium is reached when the players have the best choice, regardless of other player choice.

How does a Nash equilibrium differ from a game’s maximin solution? In what

situations is a maximin solution a more likely outcome than a Nash equilibrium?

A maximin strategy is defined where each player determines the worst outcome for each of the opponent’s action and decides to maximizes the minimum gain that can be earned. In contrast, to the Nash equilibrium does not require players act on opponent’s decision.

Question 2

Refer to Figure 1.

Explain briefly why the labour supply curve is bending backwards.

The reasons of the labour supply curve bending backwards are:

1. The substitution of leisure for work
2. Increase in income this leads to a rise in demand of normal commodities that include leisure

Question 3

Why is the Cournot equilibrium stable (i.e., why don’t firms have any incentive to change their output levels once in equilibrium)? Even if they can’t collude, why don’t firms set their outputs at the joint profit-maximizing levels (i.e., the levels they would have chosen had they colluded)?

A Cournot equilibrium is stable since the firms are producing the amount that ensures maximises their profits. Therefore, if all firms hold this view they would be no incentive to change output. Consequently, without collusion or changes in the market firms find it difficult to agree to reduce output. Nevertheless, once a firm reduces its output, other firm find the incentive to increase output and increase profit at the expense of the firm that reduce their output.

Question 4

Consider two types of employers, a perfectly competitive employer and a monopsonist. If the monopsonist has to pay a higher wage to attract more workers, why, other things being equal, will he pay a lower wage than a perfectly competitive employer?

The profit maximizing level of employment is where the marginal cost of labour equates with the marginal revenue product of employing extra workers. A single firm that has control over the price of its products but faces no competition in the labour market is known as a monopsony. The monopsony, being the only employer understands that by hiring more labour it will affect the wage it has to pay. They therefore use their buying power to drive down their wages. In a perfectly competitive market, one employs the workers at an average wage rate but has no power to push down the marginal revenue of the workers since he is not the only buyer in the market.

5. In the Stackelberg model, the firm that sets output first has an advantage. Explain why.

In the Stackelberg model, the leader gains advantage since the second firm must accept the leader large output as given and the second firm produces smaller units of output. However, in case the second firm decides to produce larger quantity this would lead to a reduce price and profit for both firms. Therefore, the first firm acknowledges that the second firm is bound to produce a smaller output to maximise profit and thus the first firm is at an advantage to capture a large market share constrained by profits in the industry.

What do the Cournot and Bertrand models have in common? What is different about the two models?

Both are oligopoly models. In the Cournot model each firm assume that other rival firms will not change the quantity produced. In contrast the Bertrand model each firm assume that other rival firms will not change the price. In both models take the behaviour of the other firm ( either price or quantity ). The principle difference between the two comes about in the Bertrand model firms will produce where price equals marginal cost while in Cournot model takes a different approach the firms will produce more than the monopoly output but less the competitive output.

What is an efficiency wage? Why is it profitable for the firm to pay it when workers have better information about their productivity than firms do?

An efficiency wage is the wage at which no shirking occurs. If employers fail to monitor there employees their output may shirk, which will affect the firms output and profits. Therefore, the firm will pay their workers more than the market wage, therefore reducing the workers’ incentive to shirk, since they acknowledge that in case they lose their jobs they will work for another, their wage will decrease.

Part II

Joanna has a credit card account with Card Bank. Card Bank’s available strategies are raise Joanna’s credit card interest rate or do nothing. Joanna’s available strategies are transfer her Card Bank account balance to another creditor or do nothing. If Card Bank raises Joanna’s interest rate and Joanna does nothing, Card Bank increases profits by $1,000 while Joanna receives $-1,000. If Card Bank raises Joanna’s interest rate and Joanna transfers her account to another creditor, Card Bank receives $-300 while Joanna receives $-100. If Card Bank does nothing and Joanna does nothing, each player receives $0. If Card Bank does nothing and Joanna transfers her account to another creditor, Card Bank receives $-300 while Joanna receives $-150. Diagram the game tree for this sequential game. Indicate any Nash equilibria.

The Nash equilibrium is for both players to choose the “Do Nothing” strategy.

The game tree is indicated below.