Economic strategy and game theory

March 27, 2021 Due: April 9, 2021 Question 1. A manufacturer of automobile tires produces at a cost of $10 per tire. It sells tires to a retailer who in turn sells the tires to consumers. Suppose that the retailer faces the inverse demand curve p = 200 - 100 That is, if the retailer put q tires on the market, then these tires will be sold at a price of p = 200 - . The retailer has no cost of production, other than whatever it must pay to the manufacturer for the tires. (a) Suppose that the manufacturer and retailer interact as follows. First, the manufacturer sets a price r that the retailer must pay for each tire. Then, the retailer decides how many tires q to purchase from the manufacturer and sell to consumers. The manufacturers payoff (profit) is q(x - 10), whereas the retailers profit is 200 - 9 q - xq = 200q - 100 - xq Calculate the subgame perfect equilibrium of this game. (b) Suppose that the manufacturer sells its tires directly to consumers, bypassing the retailer. Thus, the manufacturer can sell q tires at price p = 200 - 18. Calculate the manufacturers profit-maximizing choice of q in this case. ( c) Compare the joint profit of the manufacturer and retailer in part (a) with the manufacturers profit in part (b)