Problem 09-11 (Essay, Autogradable))

Ford executives announced that the company would extend its most dramatic consumer incentive program in the company's long history-the Ford Drive America Program. The program provides consumers with either cash back or zero percent financing for new Ford vehicles. As the manager of a Ford franchise, how would you expect this program to impact your firm's bottom line?

Profits likely will fall in the short run and remain low for the long run.
Profits likely will not change in the short or long run.
Profits likely will increase in the short run but return to normal in the long run as rivals respond with similar plans.
Profits likely will increase in the short run and stay high for the long run regardless of rivals' responses.

The opening statement on the Web site of the Organization of Petroleum Exporting Countries (OPEC) says its members seek " . . .to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."

To achieve this goal, OPEC attempts to coordinate and unify petroleum policies by raising or lowering their collective oil production. However, increased production by Russia, Oman, Mexico, Norway, and other non-OPEC countries has placed downward pressure on the price of crude oil. To achieve its goal of stable and fair oil prices, what must OPEC do to maintain the price of oil at its desired level?

Increase output.
Reduce output.
Maintain its current output.

Why might this be difficult for OPEC to do?

Member countries will not be able to make the necessary adjustments in their production levels.
Member profits will be lower, so each member may be more willing to cheat on the collusive production levels.
Member countries will be unable to determine an optimal collective production level.

Problem 09-16

Semi-Salt Industries began its operation in 1975 and remains the only firm in the world that produces and sells commercial-grade polyglutamate. While virtually anyone with a degree in college chemistry could replicate the firm's formula, due to the relatively high cost, Semi-Salt has decided not to apply for a patent. Despite the absence of patent protection, Semi-Salt has averaged accounting profits of 5.5 percent on investment since it began producing polyglutamate-a rate comparable to the average rate of interest that large banks paid on deposits over this period. Does this rate of return indicate that Semi-Salt is earning monopoly profits?

Why are their profits at the level they are?

Problem 10-03 (Algo)

Use the following payoff matrix for a simultaneous-move one-shot game to answer the accompanying questions.

a. What is player 1's optimal strategy?

Player 1 does not have an optimal strategy.

Strategy A.

Strategy B.

b. Determine player 1's equilibrium payoff.

Problem 10-08 (Algo)

Use the following payoff matrix for a one-shot game to answer the accompanying questions.

a. Determine the Nash equilibrium outcomes that arise if the players make decisions independently, simultaneously, and without any communication.

Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.

(-250,10)
(40,40)
(20,20)
(10,-250)

Which of these outcomes would you consider most likely?

(40,40)
(10,-250)
(-250,10)
(20,20)

b. Suppose player 1 is permitted to "communicate" by uttering one syllable before the players simultaneously and independently make their decisions. What should player 1 utter?

What outcome do you think would occur as a result?

(40,40)
(10,-250)
(20,20)
(-250,10)

c. Suppose player 2 can choose its strategy before player 1, that player 1 observes player 2's choice before making her decision, and that this move structure is known by both players. What outcome would you expect?

(-250,10)
(10,-250)
(20,20)
(40,40)

Problem 10-12 (Algo)

Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $1,000. If both firms make side-impact airbags standard equipment, each company will earn profits of $0.5 billion. If neither company adopts the side-impact airbag technology, each company will earn $1 billion. If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $1.5 billion and the other company will earn $-0.5 billion.

If you were a decision maker at Honda, would you make side-impact airbags standard equipment?

There is not enough information to answer the question.

Yes.
No.

If Toyota and Honda were able to cooperate, would you expect this same outcome?

There is not enough information to answer the question.

Yes.
No.

Problem 10-16 (Algo)

You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. Toyota has asked your company and your only rival to simultaneously submit a price quote for supplying 100,000 front and rear windshields for its new Highlander. If both you and your rival submit a low price, each firm supplies 50,000 front and rear windshields and earns a zero profit. If one firm quotes a low price and the other a high price, the low-price firm supplies 100,000 front and rear windshields and earns a profit of $11 million and the high-price firm supplies no windshields and loses $2 million.

If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a $6 million profit. Determine your optimal pricing strategy if you and your rival believe that the new Highlander is a "special edition" that will be sold only for one year.

Would your answer differ if you and your rival were required to resubmit price quotes year after year and if, in any given year, there was a 50 percent chance that Toyota would discontinue the Highlander?

No - a collusive outcome cannot be sustained as a Nash equilibrium.
Yes - a collusive outcome can be sustained as a Nash equilibrium.

Problem 10-17 (Algo)

At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg's was quoted as saying, " . . . for the past several years, our individual company growth has come out of the other fellow's hide." Kellogg's has been producing cereal since 1906 and continues to implement strategies that make it a leader in the cereal industry. Suppose that when Kellogg's and its largest rival advertise, each company earns $2 billion in profits. When neither company advertises, each company earns profits of $14 billion.

If one company advertises and the other does not, the company that advertises earns $44 billion and the company that does not advertise loses $4 billion. For what range of interest rates could these firms use trigger strategies to support the collusive level of advertising?

Instruction: Enter your answer as a percentage rounded to the nearest whole number.