Question

Problem 1.

Alice and Bob sell used CDs at music festivals. Each is deciding whether or not to set up their booth at the last festival of the summer. The festival is scheduled to take place in Alton, very near where Alice lives. It will cost her only $30 to travel the festival. Bob is farther away, and it will cost her $100 to travel to Alton. Both Alice and Bob would prefer to be only CD sellers at the festival, since they would avoid competition. If only one seller is at the festival, she will make $150 during the day (not counting travel costs). If both Bob and Alice sell CDs at the festival, they will lower their prices and each make $50 during the day. Both Alice and Bob receive $0 for not attending the festival.

1. Draw the Normal Form of the game Alice and Bob are playing, be sure to label the game completely.

2. Does either player have a dominant strategy? If so, what is it?

3. List all pure strategy Nash equilibria for this game. Remember that a Nash equilibrium is a strategy profile.

Answer 1