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:
(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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