Please show your work! I\'m really struggling to understand this concept. Consid

Question

Please show your work! I'm really struggling to understand this concept.

Consider the following game. In the first stage, firm 1 decides how mu Ch to advertise a. In the second stage, firm 1 observes firm 1's advertising decision and then decides how mu Ch to produce. In the third stage, firm 2 observes firm 1's production and advertisement decisions and then decides how mu Ch to produce. Market inverse demand: P(Q) = a - Q Firm 1's cost function: c1(q1, a) = a2/192 Firm 2's cost function: c2(q2) = 0 (Notice neither firm has a marginal cost of production) Does this game have perfect or imperfect information? Explain. Find all SPNE of this game. What are the profits to each firm for each SPNE you found.

Explanation / Answer

A) YES IT HAS PERFECT INFORMATION

MCOsT FIRM I = equate 3*a^2/192 to a-Q and get Q IN terms of a

mcost firm 2 = 0

http://en.wikipedia.org/wiki/SPNE this might be helful

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