1. Two banks are operating in a duopolistic market, and each is considering whether to cut their interest rates or leave them the same. They have the following payoff matrix:
Bank |
|||
Maintain rate |
Cut rate |
||
Bank |
Maintain rate Cut rate |
(50, 50) (70, 20) |
(20, 70) (30, 30) |
a. Does either bank have a dominant strategy?
b. Does the above game represent a Prisoner’s Dilemma? Explain.
c. Is there any way in which the two banks can achieve co operation?
2. Assuming a linear market demand function and linear cost functions with no fixed costs, show the differences in output, price and profits between the Cournot and Stackelberg oligopoly models.