ECO550 week 6 Problem Set

Managerial Economics and Globalization – ECO 550

Week 6 Problem Set

1.       Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn’t matter which side it is, as long as everyone chooses the same side. Otherwise, everyone may get hurt.

a.       Does either player have a dominant strategy?

b.      Is there a Nash Equilibrium in this game? Explain.

c.       Why is this called a cooperative game?

2.      A monopolist has a constant marginal and average cost of $10 and faces a demand curve of Q_D = 1000 – 10P. Marginal revenue is given by MR = 100 – 0.2Q.

a.       Calculate the monopolist’s profit-maximizing quantity, price, and profit.

b.      Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit [constant marginal and average cost] and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would be the monopolist’s quantity and profit be now?

c.       Should the monopolist try to deter entry by setting a limit price?

3.      A monopolist sells in two geographically divided markets, the East and the West. Marginal cost is constant at $50 in both markets. Demand and marginal revenue in each market are as follows:

Q_E = 900 – 2P_E

MR_E = 450 – Q_E

Q_W = 700 – P_W

MR_W = 700 – 2Q_W

a.       Find the profit-maximizing price and quantity in each market.

b.      In which market is demand more elastic?