Microeconomics

Question 2 (15 points) In a duopoly, ACME and BUSIBUSI must choose their business strategies moving forward. The strategies chosen by both firms influence profits according to the payoff matrix below. The firms are rational profit maximizers. The strategic interaction and firms' economic rationality are common knowledge. BUSIBUSI New Product More Marketing BUSIBUSI: $8M profit BUSIBUSI: $3M profit Growth ACME: $4M profit ACME: $3M profit ACME BUSIBUSI: $3M profit BUSIBUSI: $4M profit Cornering ACME: $3M profit ACME: $8M profit Part a) Suppose the two firms choose their business strategies simultaneously. a.1) What is ACME's best response function? a.2) What is a "dominant strategy"? Does ACME have a dominant strategy? Explain. a.3) In a game of strategy, what is a "Nash Equilibrium"? Find all the Pure Strategy Nash Equilibriums in this game. Part b) In this game, we want to see if either firm has an advantage at moving first, so that the other firm chooses its business strategy after learning what the first mover firm has chosen? b.1) Suppose ACME chooses first. How many strategies are available to BUSIBUSI? b.2) Illustrate the sequential strategic interaction using a decision tree. b.3) Solve the game using backward induction. What is the Subgame Perfect Nash Equilibrium strategy profile