Economics

IIl* 254 PART 1 MicroeconomicAnalysis

a. Does either f,rm have a dominant strategy, and if so, what is it?

b. What is the Nash equilibrium of this game? c. Why would thirs be called a prisoner's dilemma

game?

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 hut.

Driver 2

a. Is the. monopolist's threat to charge a Iow \aiUte: That is, if the entrant hp^o comeprice

in, wo it make sense for the m ist to charge a price? Explain. What is Nash equilibrium of How could monopolist make fight

7. The following show a opolist and a potential entrarrt.

Potential Entrant

a. Labe] the and quantity.

b. Identify a limit the monopolist could set to prevent

c. How much the lose by setting a iimit price price? Does strategy?

than profit-maximizing

8. The following show cost curves fortwo firms would like to a cartel in the market in they are se

MR

MoNoPor"tsr Pnrce Htex

PRrcE Low

DoN'r Erurra

50,0 10,0

EN.ER

20, r0 5,-10

b. C.

Lsrr RIGHT

LErr

0,0 -1 000, -1 000

Rr6Hr

-1 000, -1 000 0,0

a.

b.

C.

4.A

Does either playerhave a dominant strategy? Is there a Nash equilibrium in this game? Explain. Why is this called a cooperative game?

that everyone knows is flipping.

skilled is able to whichever way he warrts) and ner gets $10

or tails. The win-2

Player 2 (<all)

PLAYER 1 (FuP)

HEADS TArLs -10,10 10, -'10 10, -1 0 -'r 0, I0

either player have a strates/? this game?there a Nash equilibrium

Explain. . Games like this are called ze't"o-sLtrtt ga?rLes.

Can you explain why?

A monopolist has a constant marginal and aver- age cost of $10 and faces a demand curve of 0D = 1000 - 10P. Marginal revenue is given by MR = t0a-v59. a. Calculate the monopolist's profit-maximizing

quantity, price, and profit. b. Now suppose that the monopolist fears entry,

trut thinks that other flrms could produce tlte product at a cost of $15 per unit (constarrt mar- ginal and average cost) and that many firms could potentially enter. How could the monopo- list attempt to deter entry, and what wottld the monopoiist's quantity and profit be now?

c. Should the monopoli$ ry to deter entry by set- ting a limit price?

Consider a market with a monopolist and a firm that is considering entry. The new firm l<nows tlnt if the monopolist "fights" (i.e., sets a low price after the entrant comes in), the new frrm will lose money. If the monopolist accommodates (continues to charge a high price), the new flrm will make a proflt.

a. b.

mean this would be a bad

MCt

6.

a. Use two marginal cost curves construct a marginal cost curve, that on

the graph. the cartel's profit-maximizing and

, as well as the output of each flnii. c. Use lyour graphs to explain why each car-

tel rhember has an incentive to cheat on the agreement.

Economics for Managers, Third Edition, by Paul G. Farnham. Published by Prentice Hall. Copyright O 2014 by Pearson Education, lnc.

Monopolist

price