Coke
and Pepsi are the only two competitors in the market for premium cola. The
total industry profit available is 20 million dollars. Either firm can choose to advertise their
product, or to not advertise. It costs
a firm 2 million dollars to advertise.
If they both choose to advertise, they split the industry profits (less
their advertising cost). If the don’t
choose to advertise, they will split industry profits. Alternatively, if one firm chooses to advertise
while the other doesn’t, the firm that chose to advertise grabs the entire
market (less their advertising cost).
(a)
Set
up the payoff matrix for this game.
(b)
What
is the equilibrium for this game?
Microsoft
and IBM are the only two firms who sell mouse pads. Market demand is given by
the equation QD = 32 – 2P and consumers who buy do so at the firm
with the lowest price. If Microsoft and
IBM charge the same price, half the buyers go to each firm. Each mouse pad
costs $4 to produce and there are no fixed costs. Both firms set their price simultaneously.
(a)
What
is the joint profit-maximizing price (i.e., what price would Microsoft and IBM
charge if they were able to collude)? What profit would each store make if it
set this price?
(b)
Suppose
IBM and Microsoft compete by simultaneously choosing prices and can set either
the joint profit maximizing price in part a or can charge $1 less. What are
profits if both IBM and Microsoft decide to charge $1 less. Show a payoff matrix of the profits of the two
firms.
(c)
What
price will each firm charge in the equilibrium for this game?
What
is the dominant strategy for each player in the following games?
A.
|
Player 1 |
Player 2 |
||
|
|
Left |
Middle |
|
|
Up |
1,0 |
1,2 |
|
|
Down |
0,3 |
0,1 |
|
B.
|
Player 1 |
Player 2 |
|||
|
|
Left |
Middle |
Right |
|
|
Up |
1,2 |
0,5 |
5,1 |
|
|
Down |
2,6 |
9,7 |
400,6 |
|
|
Bob |
0,8 |
1,14 |
2,13 |
|
Conceptual Questions (i.e. Weird, but
interesting)
A
beach is a mile long, and sunbathers are distributed evenly along the
beach. Two ice cream vendors – Ice
Dream and Yogurt Express – sell ice cream to sunbathers. Assume that sunbathers choose to go to the
closest ice cream vendor. What is the
Equilibrium location for these two ice cream vendors?
The
Backroad Boyz and N’Stink are both in the market for selling love songs.
These two bands are the only suppliers in the love song market. Assume that
each band’s marginal cost for producing a love song is $15. The Boyz
and N’Stink choose the price to sell their songs in the market. Assume that these songs are so generic that
screaming female fans buy the lowest cost love song.
(a)
What
is the equilibrium set of prices for
both bands? What is each band’s market
share?
(b)
The
Boyz lose a pivotal member of their band A-Jay to a shameful addiction to
gummi-bears. As a result, their
marginal cost of supplying a love song
increases to $20. What is the equilibrium set of prices?
Multiple Choice
1.
Under monopolistic competition, each firm
A)
earns
zero economic profits in the long run.
B)
earns
positive economic profit in the long run.
C)
produces
the same product.
D)
produces
at the minimum of its average total cost curve.
E)
b
and d.
2. Which type of firm has no control over the
price of its product?
A) A perfectly competitive firm.
B) An oligopolist.
C) An unregulated monopolist.
D) A monopolistically competitive firm.
3. Which of the following pairs of market types
are characterized by a large number of firms?
A) Monopoly and oligopoly
B) Monopoly and monopolistic competition
C) Perfect competition and oligopoly
D) Perfect competition and monopolistic
competition
4. In a game theory equilibrium as presented in
class,
A). each player is choosing its best strategy
given the strategies of the other players.
B) players use only dominant strategies.
C)
players
choose the combination of strategies that maximize the payoffs to the entire
set of players.
D)
a
player may find that unilaterally deviating to a different strategy is
profitable.
E)
players
always choose the actions which are worst for their opponents.
5. In a game theory equilibrium as presented in class,
A)
every
player must use a dominated strategy.
B)
each
player chooses his/her best action given the strategies of the other players.
C)
each
player maximizes his/her payoff, ignoring the behavior of other players.
D)
players
maximize their joint payoffs.
E)
(B)
and (D)
6.
|
|
Up |
Down |
|
Left |
X,
10 |
2,6000 |
|
Right |
100,1 |
8,2 |
For
what values of X is (Right, Down) a Equilibrium?
(a)
X
= 0
(b)
0
< X <25
(c)
X
< 100
(d)
X
= 99
(e)
All
of the above