Question

4. Alan and Bella are two shop owners that rent bicycles. They rent out identical bicycles and each need to set the price for their bicycles. Alan's price is denoted Pa and number of bicycles rented at that price Qa. Bella's price is denoted Pb and number of bicycles rented at that price Qb. It costs each Alan and Bella $4 to rent out a bike, 2 assume they can always fnd a bike to rent out if a customer requests it. a) An initial market survey shows that the relationship between prices and quantities are Qa = 16 − 4Pa + 2Pb and Qb = 24 − 2Pb + 4Pa. What is the Nash equilibrium? [3 points] b) Consider the situation when Alan and Bella do not choose their price simultaneously? If Alan chooses his price first, what are the prices for Alan (Pa) and Bella (Pb)? [3 points]

Answer 1