GAME THEORY:
Two countries produce oil. The per unit production cost of Country 1 is C1 = $2 and of country 2 it is C2 = $4. The total demand for oil is Q = 40p where p is the market price of a unit of oil. Each country can only produce either 5 units, 10 units or 15 units. The total production of the two countries in a Nash equilibrium is:
A. 10
B. 15
C. 20
D. 25
E. 30
Please show all work and explain! Thank you!
Firm 2 

5 
10 
15 

5 
( 140, 130) 
( 115, 210) 
( 90, 240) 

Firm 1 
10 
( 230, 105) 
( 180, 160) 
( 130, 165) 

15 
( 270, 80) 
( 195, 110) 
( 120, 90) 

If both produce 5 units each then we can calculate price in the market P = 30. At price = 30 profit to country 1 = (302)*5 = 140 and to country 2 will be (304)*5 = 130 
Similarly we can calculate the profit level for each level of production by each firm. 
We will find the best response of each firm
Firm 1
BR1( Q2 = 5) = 15
BR1( Q2 = 10) = 15
BR1( Q2 = 15) = 10
Firm 2
BR2( Q1 = 5) = 15
BR2( Q1 = 10) = 15
BR2( Q1 = 15) = 10
The nash equilibrium is the mutual best response. So firms will produce Q1 =10 Q2 =15 or Q1 = 15 or Q2 = 10. Therefore Total output produce dwill be 25.
The correct option is D
Get Answers For Free
Most questions answered within 1 hours.