Practice Questions 8

Question 1:

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?

Question 2:

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?

Question 3:

What is the dominant strategy for each player in the following games?

A.

B.

Conceptual Questions (i.e. Weird, but interesting)

Question 4:

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?

Question 5:

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.

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