Consider a simplified model in which everyone gets electricity either from solar power or from…

Consider a simplified model in which everyone gets
electricity either from solar power or from fossil fuels, which are both in
relatively inelastic supply. (In the case of solar power, think of the required
equipment as being in inelastic supply.) The upfront costs of using solar
energy are high, so when the price of fossil fuels is low (that is, when few
people are using fossil fuels and there is a high demand for solar equipment),
the cost of solar can be prohibitive. In contrast, when many individuals are
using fossil fuels, the demand for them (and thus the price) is high, whereas
the demand (and thus the price) for solar energy is relatively lower. Assume
the payoff table for the two types of energy consumers to be as follows:

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(a) Describe all possible ESSs of this game in terms of
s, the proportion of solar users, and explain why each is either stable or
unstable.

(b) Suppose there are important economies of scale in
producing solar equipment, such that the cost savings increase the payoffs in
the (solar, solar) cell of the table to (y, y) where y . 2. How large would y
need to be for the polymorphic equilibrium to have s 5 0.75?

 

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