Econ 402, Fall 2016Assignment 2 â Based on lecture 3&4Question 1 (3 pt)There is a collection of n NGOs operating in the health sector of a country, where n?3. Each NGOcan choose either to invest in a large-scale and collaborative project with other NGOs, or invest inan independent, small-scale, project where the NGO does not have to collaborate with otherNGOs.A small-scale project is always successful and gives the NGO a payoff of S. For the large-scaleproject to succeed, at least m NGOs have to invest in it (where 2?m<n). If the large-scale project issuccessful, the value that it generates is L, which is evenly divided between the collaborating NGOs.Assume that L/n > S > 0. If the large-scale project fails, each collaborating NGO gets 0.a) Describe the normal form of this gameb) Find the BR function for an NGO.c) Find all NE (in pure strategies).Question 2 – Complementary Monopoly (3 pt)A firm sells vacation packages consisting of a plane trip and a hotel stay. Demand for completevacations is given by q(pv) = 100 – pv, where pv is the total price of the vacation. That is, pv = ph +pa, where ph and pa are the prices of the hotel stay and plane trip, respectively. Let ch be the cost ofeach hotel stay and ca be the cost of each plane trip.a) Suppose the firm chooses pv in order to maximize total profit. How much should it chargefor each vacation? How many vacations are sold? What is its profit? (Note that profits ? =p*q-c(q) : the total revenue from selling q minus the total cost)b) Suppose that the hotel division and airline division are run by separate managers, each ofwhom cares only about the profit earned by his own division. Given that the hotel divisioncharges ph, what price would the airline division charge (i.e., what price maximizes profitearned by the airline division)? Note: your answer will give pa as a function of ph. 1 Each student has to submit their own solution. You can discuss the problem set with other students. c) Derive the Nash equilibrium prices in the game played between the managers of the twodivisions. What are the corresponding quantities and profits?Question 3 â Revisiting Hotellingâs Model (4 pt)Two political parties, Left wing and Right wing compete in electoral elections. There is a continuumof voters uniformly distributed on the interval [0, 1] where 0 represents the leftmost view (extremeleft) and 1 the rightmost. Each party can declare that their view is x where 1 ? ? and eachvoter votes to the party that declare that their views are closest to his views. For example, if a voterâsview is represented by 0.3, the left party chose 1/4 and the right party chose 1/2, this voter votes forthe left party as 1/4 is closer to 0.3. If both parties choose the same spots they will split the votesbetween them.Each partyâs objective is to have the highest percentage of voters voting for it.i) Describe the normal form of the game (players, strategies, payoffs). ii) Solve the game using (pure strategy) Nash equilibrium.
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