Chapter 10: Discussion Questions
Running Head: CRITICAL THINKING #5
Critical Thinking #5
BUSI 620
Liberty University
11/25/2015
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Running Head: CRITICAL THINKING #5
3. The difference between limit pricing and contestable markets is that limit pricing is a strategy
for existing firms within in an industry places their pricing lower than average cost to create a
barrier of entry for new firms that are trying to enter the industry. Where as, contestable markets
is when there are a few firms but there is no barriers to entry; however, the entrance of new firms
makes the existing firms be competitive with their pricing.
8. OPEC is similar to a cartel in the aspect that is an organization of countries that are all
producing the same good and they all meet together to discuss how each individual country is
doing with the amount of goods they are selling and the price. It was successful, until there was
an increase in price and other countries were looking into oil substitutes. When the OPEC’s
market share fell and the oil prices fell it was not as successful.
Chapter 10: Problems
1. (a). 70² + 20² + 10² = H 4900 + 400 + 100= H
H= 5400
(b). 50² = 2500 5² = 25 25 x 10 = 250 2500+250= H
H= 2750
(c). 10² = 100 100 x 10= 1000
H= 1000
14. This would be false, because in the break even or zero profit area it requires a firm to have
the price equal the average cost. If the leader in the industry is possibly making position profits
there is nothing to say that their competition is making profits as well. This can be because the
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Running Head: CRITICAL THINKING #5
leader could have a lower average cost than its competitors. It would all be based on if there
were no barriers to entry or there are barriers to entry. If there are barriers to entry it would be
more likely for the follower to have position profits. Also, if profits are negative then you are
going to have firms shut down in the longer run and then the other firms will rise until the profits
are then zero.
Chapter 10 Froeb:
10-4. Five Forces:
-High Barriers to Entry: There are many barriers of entry into the airline industry and
looking at the fixed cost of entering into this industry. This does make the industry
attractive.
-Low Buyer Power: Market power is important to buyers and if the individual is selling to
a small group then there would be market power; however, in the U.S. passenger airline
industry it is not a small group. Knowing that this would still look to be an attractive
industry.
-Low Supplier Power: For the airline industry the supplier power could be high because
there are only a few manufactures and then the labor is unionized. With the supplier
power being high then the supplier can charge more for their services. This could lead to
the industry being less profitable. For those reasons it makes this industry less attractive.
-Low Threat from Substitutes: There are a few substitutions for the airline industry like
trains; however, a train is not going to get you all of the United States as airlines or in the
same amount of time, so the substitution would be a low threat. Although there has been
price wars between airlines and this makes the competition tough with maintaining a
profit. This would still make this an attractive industry for the most part.
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Running Head: CRITICAL THINKING #5
-Low Levels of Rivalry between Existing Firms: The airline industry does have higher
levels of rivalry or substitutions as named above. This does make it difficult with pricing
because airlines are competing over the same customers, but trying to be the lower price
with still maintaining a profit with their average costs. With the rivalry between airlines
this would make the industry not attractive.
Chapter 11: Discussion Questions
11. Yes, in Cournot equilibrium they produce 4 units at a price of then $4 dollars. The monopoly
outcome would be Q=6 units and P= $6 dollars, which would be a profit of $36 dollars. Each
would earn a profit of $16 dollars when there they are competing against the other, however, if
they become a monopolist and each produces 3 units they could then split the profit and each
earn $18 dollars. However, if the firm did this then one or the other could maximum their profits
but producing more than 3 units if they wanted too. So the cooperative outcome would not take
place if the other firm produced more than the 3 units and did not adhere to the cooperative
agreement, similar to the prisoner’s dilemma.
12. If each firm does not advertise than their cost will be lower and they will have higher profits.
If each firm were to advertise then they will have higher advertised costs and their profits will
fall to 2. If one firm were to advertise and the other does not, the one that will be advertising will
have an increase in profits (5) and they would be stealing the advertise share in the market, while
the other firm were have their profits fall (1) and they would lose the market share. For each firm
their best strategy is a dominant strategy and to advertise, because the nash equilibrium is for
both of them to advertise even though their profit would be 2 instead of 3 if they were not to
advertise. The main reason that it is better for the firms to advertise is because if a firm does not
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Running Head: CRITICAL THINKING #5
advertise then the other firm will come in a steal the market share and the profit but advertising.
To ensure that each firm does not advertise there is a commitment mechanism to make sure that
each firm does not advertise and that was obviously done but the banning of television ads, so
that profits would rise.
Chapter 11: Problems
2. If you have firm B charge a low price, then you will see firm A charge a low price. If you have
firm B charge a high price, then you will see firm A charge a high price. Firm A does not have a
dominant strategy, because it changes it’s price with B’s price.
If you have firm A charge a low price, then firm B will charge a low price. If then firm A charges
a high price, then firm B will charge a low price. However, firm B does have a dominant
strategy, because B’s price will stay the same regardless of firm A’s.
There is a Nash equilibrium and it is low, low, because firm B will always chose a low price and
then therefore firm A will always chose low.
6. Both firms are faced with the prisoner’s dilemma. When firm B charges a low price then firm
A will then charge a low price. When firm B charges a high price then firm A will then charge a
low price; so firm A’s dominant strategy will be to charge a low price. When firm A charges a
low price then firm B will then charge a low price. When firm A charges a high price then firm B
will charge a low price; so firm B’s dominant strategy will be to charge a low price. So for these
two firms the nash equilibrium is for both firms to charge a low price, and then you have a non-
cooperative equilibrium occur.
Labor:
-If the management does not hire a lawyer, then the labor will hire a lawyer
-If the management does hire a lawyer, then the labor will hire a lawyer as well
Management:
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Running Head: CRITICAL THINKING #5
10. If you have firm B enter, then you will find that firm A will then charge a high price;
however, if you have firm B not enter, then firm A will still charge a high price. So the dominant
strategy for firm A is to charge the high price. If firm A does charge a high price then firm B will
definitely enter. Firm A deterrent would not be credible, because they would not have the profits
if they did lower the price, so they must charge high. So firm B would definitely stay in the
industry then. Firm A would not do anything to contest the entry into for firm B.
Chapter 15 Froeb:
15-4. The most likely outcome from this situation is a low salary offer; this is because the
employer will reason that the employee will accept the offer versus walking away. It does make a
difference with who moves first; this is because if the employee were to move first they would
ask for a higher salary, and then the employer would want to accept to gain the employee. The
employee could move first and try for the higher salary instead of waiting for the employer to
give a lower offer or the employee could do a counter-offer.
15-5.
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Running Head: CRITICAL THINKING #5
-If the labor does not hire a lawyer, then the management will hire a lawyer
-If the labor does hire a lawyer, then the management will hire a lawyer as well
With this situation both will ultimately hire a lawyer regardless of the other decision, the nash
equilibrium would be for to hire a lawyer and expect a payoff of $300,000.
Yes, both sides would like to ban the use/hiring of lawyers to have the cooperative equilibrium of
No Lawyers.
