Managerial Economics and Business Strategy with Data Disk

Managerial Economics and Business Strategy with Data Disk

Title: Managerial Economics and Business Strategy with Data Disk

Author: Michael Baye

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Chapter 10: Test Bank Multiple Choice Questions 1. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn...

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10: Chapter Test Bank Multiple Choice Questions 1. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is a) For each firm to advertise. b) For neither firm to advertise. c) For your firm to advertise and the other not to advertise. d) None of the above. Register to View AnswerDifficulty: Med 2. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is a) For each firm to advertise every year. b) For neither firm to advertise in early years, but to advertise in later years. c) For each firm to not advertise in any year. d) For each firm to advertise in early years, but not advertise in later years. Register to View AnswerDifficulty: Med 3. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever) then a Nash equilibrium when the interest rate is zero is a) for each firm to not advertise until the rival does, and then to advertise forever. b) for your firm to never advertise. c) for your firm to always advertise when your rival does. d) for each firm to advertise until the rival does not advertise, and then not advertise forever. Register to View AnswerDifficulty: Med Managerial Economics and Business Strategy, 5e Page 1 4. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is a) For each firm to advertise. b) For neither firm to advertise. c) For your firm to advertise and the other not to advertise. d) None of the above. Register to View AnswerDifficulty: Med 5. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is a) For each firm to advertise every year. b) For neither firm to advertise in early years, but to advertise in later years. c) For each firm to not advertise in any year. d) For each firm to advertise in early years, but not advertise in later years. Register to View AnswerDifficulty: Med 6. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever) then a Nash equilibrium is a) for each firm to not advertise until the rival does, and then to advertise for ever. b) for each firm to never advertise. c) for each firm to always advertise. d) for each firm to advertise until the rival does not advertise, and then not advertise forever. Register to View AnswerDifficulty: Med Page 2 Michael R. Baye Questions 7, 8, and 9 are based on the following game, where firms one and two must independently decide whether to charge high or low prices. Firm Two High Price Firm One High Price Low Price (10, 10) (5, -5) Low Price (5, -5) (0, 0) 7. Which of the following are Nash equilibrium payoffs in the one-shot game? a) (0, 0) b) (5, -5) c) (-5, 5) d) (10, 10) Register to View AnswerDifficulty: Med 8. Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times? a) (0, 0) b) (5, -5) c) (-5, 5) d) (10, 10) e) none of the above Register to View AnswerDifficulty: Med 9. Suppose the game is infinitely repeated. Then the "best" the firms could do in a Nash equilibrium is to earn per period. a) (0, 0) b) (5, -5) c) (-5, 5) d) (10, 10) e) none of the above Register to View AnswerDifficulty: Med Managerial Economics and Business Strategy, 5e Page 3 10. Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies? a) (enter, hard) and (not enter, hard) b) (enter, soft) and (not enter, soft) c) (not enter, hard) and (enter, soft) d) (enter, hard) and (not enter, soft) Register to View AnswerDifficulty: Hard 11. Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are perfect equilibrium strategies? a) (enter, soft) b) (not enter, soft) c) (enter, hard) d) (not enter, hard) Register to View AnswerDifficulty: Hard Page 4 Michael R. Baye Answer questions 12 -15 based on the following information for a one-shot game: Firm B Low Price Firm A Low Price High Price (2, 2) (-8, 10) High Price (10, -8) (6, 6) 12. What are dominant strategies for Firm A and Firm B respectively? a) (low price, high price) b) (high price, low price) c) (high price, high price) d) (low price, low price) Register to View AnswerDifficulty: Med 13. What are secure strategies for firm A and firm B respectively? a) (low price, high price) b) (high price, low price) c) (high price, high price) d) (low price, low price) Register to View AnswerDifficulty: Med 14. What are the Nash equilibrium strategies for firm A and B respectively? a) (low price, high price) b) (high price, low price) c) (high price, high price) d) (low price, low price) Register to View AnswerDifficulty: Med 15. If this one-shot game is repeated 100 times, the Nash-equilibrium payoffs of the players will be ________________ each period. a) (2, 2) b) (10, -8) c) (-8, 10) d) (6, 6) Register to View AnswerDifficulty: Easy Managerial Economics and Business Strategy, 5e Page 5 16. Which of the following are important determinants of collusion in pricing games? a) the number of firms b) firm size c) history d) all of the above Register to View AnswerDifficulty: Easy Answer questions 17 - 20 based on the following payoff matrix: Firm B Low Price Firm A Low Price High Price (10, 9) (-10, 7) High Price (15, 8) (11, 11) 17. What are the secure strategies for Firm A and Firm B respectively? a) (low price, high price) b) (high price, low price) c) (high price, high price) d) (low price, low price) Register to View AnswerDifficulty: Med 18. Which of the following is true? a) A dominant strategy for Firm A is "high price". b) There does not exist a dominant strategy for Firm A. c) A dominant strategy for Firm B is "low price". d) none of the above Register to View AnswerDifficulty: Hard 19. What are the Nash equilibrium strategies for Firm A and Firm B respectively in a oneshot game? a) (low price, low price) b) (high price, high price) c) (low price, high price) d) a and b Register to View AnswerDifficulty: Med Page 6 Michael R. Baye 20. If this one-shot game is repeated three times, the Nash equilibrium payoffs for Firm A and B will be ______ each period) a) (10, 9) b) (11, 11) c) (-10, 7) d) (15, 8) Register to View AnswerDifficulty: Med 21. Which of the following is true? a) In a one-shot game, a collusive strategy always represents a Nash equilibrium. b) A perfect equilibrium occurs when each player is doing the best he can regardless of what the other player is doing. c) Each Nash equilibrium is a perfect equilibrium. d) Every perfect equilibrium is a Nash equilibrium. e) none of the above Register to View AnswerDifficulty: Med Answer questions 22 - 23 based on the following payoff matrix: Firm B Low Price Firm A Low Price High Price (9, 10) (7, -10) High Price (8, 15) (11, 11) 22. Which of the following is true? a) A dominant strategy for Firm A is "high price". b) There does not exist a dominant strategy for Firm A. c) A dominant strategy for Firm B is "low price". d) none of the above Register to View AnswerDifficulty: Med 23. What are the Nash equilibrium strategies for Firm A and Firm B respectively? a) (low price, low price) b) (high price, high price) c) (low price, high price) d) a. and b. Register to View AnswerDifficulty: Med Managerial Economics and Business Strategy, 5e Page 7 24. Which of the following is true? a) In an infinitely repeated game, collusion is always a Nash equilibrium. b) In a finitely repeated game with a certain end period, collusion is unlikely because effective punishments cannot be used during any time period. c) all of the above d) none of the above Register to View AnswerDifficulty: Easy 25. Which of the following is true? a) For a finitely repeated game, the game is played enough times to effectively punish cheaters and therefore collusion is likely. b) In an infinitely repeated game with a low interest rate, collusion is unlikely because the game unravels so that effective punishment cannot be used during any time period. c) A secure strategy is the optimal strategy for a player no matter what the opponent does. d) none of the above Register to View AnswerDifficulty: Med 26. Which of the following enhances the ability of waste companies to collude? a) decals on waste receptacles b) high interest rates c) differentiated nature of products d) large number of firms Register to View AnswerDifficulty: Hard 27. Collusion is: a) legal in the United States. b) not possible when firms interact repeatedly forever. c) more likely in industries with a large number of firms. d) none of the above. Register to View AnswerDifficulty: Easy Page 8 Michael R. Baye Refer to the following payoff matrix for questions 28 - 30: Player 2 t1 S1 Player 1 S2 0, 0 2, 10 10, 3 28. The dominant strategy for Player 2 is: a) t1 b) t1 and t2 c) t3 d) none of the above Register to View AnswerDifficulty: Easy 29. The dominant strategy for Player 1 is: a) S1 b) S2 c) S1 and S2 d) none of the above Register to View AnswerDifficulty: Easy 30. Which of the following strategies constitutes a Nash equilibrium of the game: a) S1, t1 b) S2, t2 c) S2, t3 d) S1, t2 Register to View AnswerDifficulty: Med 31. Which of the following conditions are necessary for the existence of a Nash equilibrium? a) The existence of dominant strategies for both players. b) The existence of a dominant strategy for one player and the existence of secure strategy for another player. c) The existence of secure strategy for both players. d) none of the above Register to View AnswerDifficulty: Hard 4, 10 t2 3, 0 t3 1, 3 Managerial Economics and Business Strategy, 5e Page 9 Refer to the following payoff matrix for questions 32 and 33: Player 2 t1 S1 Player 1 S2 10, 100 5, 0 0, -100 32. The dominant strategy of Player 1 is: a) S1 b) S2 c) S1 and S2 d) a dominant strategy does not exist. Register to View AnswerDifficulty: Med 33. Which of the following pair of strategies constitute a Nash equilibrium of the game? a) S1, t1 b) S1, t2 c) S2, t1 d) both b and c Register to View AnswerDifficulty: Hard 34. Based on the following game, what are the secure strategies for Player One and Player Two? Player 2 t1 S1 Player 1 S2 a) S1 and t2 b) S1 and t1 c) S2 and t2 d) S2 and t1 Register to View AnswerDifficulty: Med -10, 7 10, 20 10, 15 t2 15, 8 10, 0 t2 5, 1 t3 4, -200 Page 10 Michael R. Baye 35. Which of the following is true for a Nash equilibrium of a two-player game? a) The joint payoffs of the two players are highest compared to other strategy pairs. b) Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy. c) A Nash equilibrium is always unique in real world problems. d) b and c Register to View AnswerDifficulty: Med 36. Game theory is especially useful for analysis in the following types of markets: a) perfect competition. b) monopolistic competition. c) oligopoly. d) monopoly. Register to View AnswerDifficulty: Easy 37. Economists use game theory to predict the behavior of oligopolists. Which of the following is crucial for the success of the analysis? a) Make sure the payoffs reflect the true payoffs of the oligopolists. b) Make sure whether the oligopolists move simultaneously or sequentially. c) Make sure the problem considered is of a one-shot or repeated nature. d) All of the above. Register to View AnswerDifficulty: Med Use the following information to answer questions 38 and 39: Suppose that you are a manager. You are considering whether or not to monitor employees with the payoffs in the following normal form game. Worker Work Monitor Manager Don't Monitor -1, 1 1, -1 Shirk 1, -1 -1, 1 38. Which of the following pair of strategies constitute a Nash equilibrium? a) Manager monitors and worker works. b) Manager does not monitor and worker works. c) Manager monitors and worker shirks. d) None of the above. Register to View AnswerDifficulty: Easy Managerial Economics and Business Strategy, 5e Page 11 39. What should the manager do to solve the shirking problem? a) Always monitor. b) Never monitor. c) Sincerely tell workers not to shirk. d) Engage in "random" spot checks of the work place. Register to View AnswerDifficulty: Easy 40. Management and a labor union are bargaining over how much of a $50 surplus to give to the union. The $50 is divisible up to one cent. The players have one-shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. Which of the following is true? a) There are multiple Nash equilibria. b) ($25, $25) is a Nash equilibrium. c) A Nash equilibrium is also a perfect equilibrium. d) a and b. Register to View AnswerDifficulty: Med 41. Management and a labor union are bargaining over how much of a $50 surplus to give to the union. The $50 is divisible up to one cent. The players have one-shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. Which of the following is not a Nash equilibrium? a) Management requests $50 and the labor union accepts $0. b) Management requests $30 and the labor union accepts $10. c) Management requests $25 and the labor union accepts $25. d) neither a nor b are Nash equilibria. Register to View AnswerDifficulty: Hard 42. Management and a labor union are bargaining over how much of a $50 surplus to give to the union. The $50 is divisible up to one cent. The players have one-shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. Which of the following is a perfect equilibrium? a) Management requests $49.99, and the labor union accepts $0.01. b) Management requests $25, and the labor union accepts $25. c) Management requests $0, and the labor union accepts $50. d) none of the above. Register to View AnswerDifficulty: Med Page 12 Michael R. Baye 43. Management and a labor union are bargaining over how much of a $50 surplus to give to the union. The $50 is divisible up to one cent. The players have one-shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. If you were the labor union, which type of "rules of play" would you prefer to divide the $50 surplus? a) one-shot simultaneous-move game. b) one-shot sequential-move game with management as the first mover. c) one-shot sequential-move game with labor union as the first mover. d) a and b. Register to View AnswerDifficulty: Easy 44. Which of the following is true? a) A Nash equilibrium is always perfect. b) A perfect equilibrium is always Nash. c) A Nash equilibrium is always perfect in a multistage game. d) Perfect equilibrium and Nash equilibrium are the same concept but with different names. Register to View AnswerDifficulty: Med Refer to the following normal form game of price competition for questions 45 - 47. Firm B Low Price Low Price Firm A High Price -10, 50 20, 20 45. Suppose the game is infinitely repeated, and the interest rate is 10%. Both firms agree to charge a high price, provided no player has charged in low price in the past. If both firms stick to this agreement, then the present value of Firm A's payoffs are: a) 220. b) 110. c) 330. d) 550. Register to View AnswerDifficulty: Med 0, 0 High Price 50, -10 Managerial Economics and Business Strategy, 5e Page 13 46. Suppose that Firm A deviates from a trigger strategy to support a high price. What is the present value of A's payoff from cheating? a) 70. b) 50. c) 30. d) 20. Register to View AnswerDifficulty: Med 47. What is the maximum interest rate that can sustain collusion? a) 30%. b) 15%. c) 66.7%. d) 20%. Register to View AnswerDifficulty: Hard 48. It is easier to sustain tacit collusion in an infinitely repeated game if: a) the present value of cheating is higher. b) there are more players in the game. c) the interest rate is lower. d) both a and c. Register to View AnswerDifficulty: Med 49. When a worker announces that he plans to quit, say next month, the "threat" of being fired has no bite. The worker may find it in his interest to shirk. What can the manager do to overcome this problem? a) "Fire" the worker as soon as he announces his plans to quit. b) Provide the worker some rewards for good work that extend beyond the termination of employment with your firm. c) Monitor the worker more frequently than usual and fire him when he is caught shirking. d) Pay the worker some rewards when he announces his plan to quit. Register to View AnswerDifficulty: Med 50. A finitely repeated game differs from an infinitely repeated game in that: a) The former needs a lower interest rate to support collusion than the latter needs. b) There is an "end-of-period" problem for the former. c) A collusive outcome can usually be sustained in the former but not the latter. d) All of the above. Register to View AnswerDifficulty: Hard 51. Which of the following is a factor(s) affecting collusion in an infinitely repeated pricing game? a) number of firms. b) firm size. c) history. d) all of the above. Register to View AnswerDifficulty: Easy 52. A coordination problem arises whenever: a) there is no Nash equilibrium in a game. Page 14 Michael R. Baye b) there is a unique Nash equilibrium but it is not very desirable. c) there are multiple Nash equilibria. d) there are no dominant strategies for both players. Register to View AnswerDifficulty: Med 53. Which of the following is the major means to signal good quality of goods by firms? a) sales. b) advertisement. c) warranties/guarantees. d) both a and b. Register to View AnswerDifficulty: Med 54. Which of the following is not true? a) An extensive form representation usually provides more information than a normal form representation of a game. b) A normal form game is most useful for sequential-move games. c) The notion of perfect equilibrium is more useful in analyzing extensive form games than normal form games. d) The notion of credible threats makes more sense in extensive form representations than in normal form representations of a game. Register to View AnswerDifficulty: Hard 55. A Nash equilibrium with a non-credible threat as a component is: a) a perfect equilibrium. b) not a perfect equilibrium. c) a sequential equilibrium. d) a somewhat perfect equilibrium. Register to View AnswerDifficulty: Med 57. Which of the following is a valid critique of the use of game theory in economics? a) Payoffs to players may be difficult to measure. b) Players may not have complete information about each other's payoffs. c) Game theory assumes rational players. d) All of the above. Register to View AnswerDifficulty: Hard Managerial Economics and Business Strategy, 5e Page 15 Use the following information to answer questions 58 - 60: There are two existing firms in the market for computer chips. Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not. Innovation incurs a fixed set-up cost of C, while increasing the revenue. However, once the new technology is adopted, another firm, B, can adopt it with a smaller set-up cost of C/2. If A innovates and B does not, A earns $20 in revenue while B earns $0. If A innovates and B does likewise, both firms earn $15 in revenue. If neither firm innovates, both earn $5. 58. Under what condition will Firm B have an incentive to adopt if Firm A adopts the innovation? a) C > 30. b) C < 30. c) 10 > C > 0. d) 35 > C > 25. Register to View AnswerDifficulty: Hard 59. Under what condition will Firm A innovate? a) C > 30. b) C < 30. c) 10 > C > 0. d) 35 > C > 25. Register to View AnswerDifficulty: Hard 60. If C = 15, which is the perfect equilibrium of the game? a) A innovates, B does not. b) A innovates, B innovates. c) Neither firm innovates. d) None of the above. Register to View AnswerDifficulty: Hard 61. Game theory suggests that, in the absence of patents, the privately motivated innovation decisions of firms might lead to: a) too little innovation. b) too much innovation. c) the socially efficient level of innovation. d) none of the above. Register to View AnswerDifficulty: Easy Page 16 Michael R. Baye 62. If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. Which of the following is true? a) A dominant strategy for Firm A is to advertise. b) A dominant strategy for Firm B is to advertise. c) A Nash equilibrium is for both firms to advertise. d) All of the above are true. Register to View AnswerDifficulty: Med 63. If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. Which of the following is true? a) A secure strategy for Firm A is to not advertise. b) A secure strategy for Firm B is to not advertise. c) Firm A does not have a secure strategy. d) None of the above are true. Register to View AnswerDifficulty: Med 64. If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. Suppose this game is repeated for a finite number of times, but the players do not know the exact date at which the game will end. The players can earn collusive profits as a Nash equilibrium to the repeated play of the game if the probability the game terminates in any period is a) 1. b) greater than one. c) close to zero. d) none of the above. Register to View AnswerDifficulty: Med 65. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. Which of the following is true? a) A dominant strategy for Firm A is to advertise. b) A dominant strategy for Firm B is to advertise. c) A Nash equilibrium is for both firms to advertise. d) None of the above are true. Register to View AnswerDifficulty: Med Managerial Economics and Business Strategy, 5e Page 17 66. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. Which of the following is true? a) A secure strategy for Firm A is to not advertise. b) A secure strategy for Firm B is to advertise. c) Firm A does not have a secure strategy. d) None of the above are true. Register to View AnswerDifficulty: Med 67. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. Suppose this game is repeated for a finite number of times, but the players do not know the exact date at which the game will end. The players can earn profits of $10 each period as a Nash equilibrium to a repeated play of the game if the probability the game terminates at the end of any period is a) close to 1. b) close to 0. c) between zero and one. d) all of the above. Register to View AnswerDifficulty: Med Questions 68, 69, and 70 are based on the following game, where firms one and two must independently decide whether to charge high or low prices. Firm Two High Price Firm One High Price Low Price (10, 10) (-5, 5) Low Price (5, -5) (0, 0) 68. Which of the following are secure strategies for players one and two, respectively? a) (High Price, High Price). b) (High Price, Low Price). c) (Low Price, High Price). d) (Low Price, Low Price). Register to View AnswerDifficulty: Med Page 18 Michael R. Baye 69. If player one charges a High Price when player two charges a Low Price, then player two earns: a) 10. b) 5. c) -5. d) 0. Register to View AnswerDifficulty: Med 70. A dominant strategy for firm one is a) high price. b) low price. c) different from firm one's secure strategy. d) b and c. Register to View AnswerDifficulty: Med 71. Consider the following innovation game. Firm A must decide whether or not to introduce a new product. Firm B must decide whether or not to clone firm A's product. If firm A introduces and B clones, then firm A earns $1 and B earns $10. If A introduces and B does not clone, then A earns $10 and B earns $2. If firm A does not introduce, both firms earn profits of 0. Which of the following is true. a) The subgame perfect Nash equilibrium profits are ($10,2). b) It is not in A's interest to introduce. c) Firm A does not care if B clones. d) None of the above are true. Register to View AnswerDifficulty: Hard 72. Consider the following innovation game. Firm A must decide whether or not to introduce a new product. Firm B must decide whether or not to clone firm A's product. If firm A introduces and B clones, then firm A earns $1 and B earns $10. If A introduces and B does not clone, then A earns $10 and B earns $2. If firm A does not introduce, both firms earn profits of 0. How many Nash equilibria are there for this game. a) 0. b) 1. c) 2. d) 0, but there are secure strategies. Register to View AnswerDifficulty: Hard Managerial Economics and Business Strategy, 5e Page 19 Answer questions 73 - 75 based on the following information for a one-shot game: Firm B Low Price Firm A ` Low Price High Price (2, 2) (-8, 10) High Price (10, -8) (15, 15) 73. What are the dominant strategies for Firm A and Firm B respectively? a) (low price, high price). b) (high price, low price). c) (high price, high price). d) neither firm has a dominant strategy. Register to View AnswerDifficulty: Med 74. What are secure strategies for firm A and firm B respectively? a) (low price, low price). b) (high price, low price). c) (high price, high price). d) neither firm has a secure strategy. Register to View AnswerDifficulty: Easy 75. What are the Nash equilibrium strategies for this game? a) (low price, low price). b) (high price, high price). c) a and b. d) none of the above. Register to View AnswerDifficulty: Med For questions 76-78, consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $3 million in profits. If neither of you advertise, you will each earn $7 million in profits. if However, one of you advertises and the other does not, the firm that advertises will earn $10 million and the non advertising firm will earn $1 million. 76. If you and your rival plan to be in business for only one year, the Nash equilibrium is for your firm a) and your rival to advertise. b) and your rival not to advertise. c) to advertise and your rival not to advertise. d) not to advertise and your rival to advertise. Register to View AnswerDifficulty: Easy Page 20 Michael R. Baye 77. If you and your rival plan to be in business for 15 years, then the Nash equilibrium is for a) you and your rival to not advertise in any year. b) you and your rival to advertise every year. c) neither firm to advertise in early years, but to advertise in later years. d) each firm to advertise in early years, but not advertise in later years. Register to View AnswerDifficulty: Med 78. If you and your rival plan to hand your business down to your children, and this "bequest" goes on forever, then a Nash equilibrium when the interest rate is zero is for a) your firm to never advertise. b) your firm to always advertise when your rival does provided that the interest rate is sufficiently large. c) each firm to not advertise until the rival does, and then to advertise forever provided the interest rate is sufficiently low. d) each firm to advertise until the rival does not advertise, and then not advertise forever. Register to View AnswerDifficulty: Hard 79. Which of the following is a correct statement about a Nash equilibrium in a two-player game? a) The joint payoffs of the two players are highest compared to other strategy pairs. b) A Nash equilibrium is always unique in real world problems. c) Given another player's strategy, no player can improve her welfare by unilaterally changing her strategy. d) All of the above. Register to View AnswerDifficulty: Easy 80. Game theory is best applied to analysis of a) perfect competition. b) oligopoly. c) monopoly. d) All of the above. Register to View AnswerDifficulty: Easy 81. When analyzing the behavior of oligopolists, which of the following is crucial for the success of game theoretic analysis? a) Payoffs do not need to reflect the true payoffs of the oligopolists, they just need to be greater than or equal to zero. b) Assume that oligopolists always move simultaneously. c) Do not construct the payoffs of the oligopolists to be interdependent, as the payoff of one player usually does not affect the payoff of the other players. d) Make sure the problem you are considering is of a one-shot or repeated nature, and you model it accordingly because the order in which players make decisions is important. Register to View AnswerDifficulty: Med Managerial Economics and Business Strategy, 5e Page 21 82. Management and a labor union are bargaining over how much of a $50 surplus to give to the union. The $50 is divisible up to one cent. The players have one-shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. Which of the following is a Nash equilibrium? a) Management requests $50 and the labor union accepts $0. b) Management requests $35 and the labor union accepts $10. c) Management requests $20 and the labor union accepts $20. d) Management requests $25 and the labor union accepts $10. Register to View AnswerDifficulty: Hard 83. Which of the following is a correct statement? a) A Nash equilibrium is always perfect. b) A perfect equilibrium is always Nash. c) A Nash equilibrium is always perfect in a multistage game. d) None of the above. Register to View AnswerDifficulty: Med 84. It is easier to sustain tacit collusion in an infinitely repeated game if a) the present value of cheating is lower than collusion. b) there are many players. c) the interest rate is higher. d) both a and c. Register to View AnswerDifficulty: Easy 85. Firms will try to signal superior quality of their goods by a) making sales information available to the public. b) advertising. c) issuing warranties or guarantees. d) both a and b. Register to View AnswerDifficulty: Easy 86. A coordination problem usually occurs in situations where there is a) no Nash equilibrium in a game. b) a unique, but undesirable Nash equilibrium. c) a unique secure strategies for both players. d) more than one Nash equilibrium. Register to View AnswerDifficulty: Med 87. Which of the following is not an important determinant of collusion in pricing games? a) the number of firms in the industry. b) the punishment mechanisms that are in place. c) the history of the particular market. d) None of the above. Register to View AnswerDifficulty: Easy Page 22 Michael R. Baye Refer to the following normal form game of price competition for questions 88 - 90. Firm B Low Price Low Price Firm A High Price -5, 25 10, 10 0, 0 High Price 25, -5 88. Suppose the game is infinitely repeated, and the interest rate is 5%. Both firms agree to charge a high price, provided no player has charged in low price in the past. If both firms stick to this agreement, then the present value of Firm B's payoffs are: a) 105 b) 190 c) 210 d) 525 Register to View AnswerDifficulty: Med 89. Suppose that Firm A deviates from a trigger strategy to support a high price. What is the present value of A's payoff from cheating? a) 5 b) 20 c) 25 d) 35 Register to View AnswerDifficulty: Easy 90. What is the maximum interest rate that can sustain collusion? a) 66.7% b) 33% c) 25% d) 15% Register to View AnswerDifficulty: Hard Managerial Economics and Business Strategy, 5e Page 23 Technical Questions and Problems 1. In a one-shot game, if you advertise and your rival advertises, you will each earn $5 million in profits. If neither of you advertise, your rival will make $4 million and you will make $2 million. If you advertise and your rival does not, you will make $10 million and your rival will make $3 million. If your rival advertises and you do not, you will make $1 million and your rival will make $3 million. a. Write the above game in normal form. b. Do you have a dominant strategy? c. Does your rival have a dominant strategy? d. What is the Nash equilibrium for the one-shot game? e. How much would you be willing to bribe your rival not to advertise? Register to View AnswerYour Rival Advertise Advertise Do Not Advertise (5, 5) (1, 3) Do Not Advertise (10, 3) (2, 4) You b. Your dominant strategy is to advertise. c. Your rival does not have a dominant strategy. d. The only Nash equilibrium is for you to advertise and for your rival to advertise also. e. You are willing to bribe your rival not to advertise by an amount up to $5 million. This is because when you bribe your rival by an amount less than $5 million and if your rival really cooperates, then you can get $10 million gross profit. Subtracting the bribe, you still get an amount of net profit greater than what you otherwise get by not bribing. Of course, this ignores legal considerations as well as the problem of ensuring that your rival does not cheat on the collusive agreement. Page 24 Michael R. Baye 2. You operate in a duopoly in which you and a rival must simultaneously decide what price to advertise in the weekly newspaper. If you each charge a low price, you each earn zero profits. If you each charge a high price, you each earn profits of $3. If you charge different prices, the one charging the higher price loses $5 and the one charging the lower price makes $5. a. Find the Nash equilibrium for a one-shot version of this game. b. Now suppose the game is infinitely repeated. If the interest rate is 10 percent, can you do better than you could in a one-shot play of the game? Explain. c. Explain how "history" affects the ability of firms in this game to achieve an outcome superior to that of the one-shot version of the game. Register to View AnswerBoth players charging low prices is a unique Nash equilibrium for a one-shot version of the game. Your Rival Low Price Low Price You High Price (-5, 5) (3, 3) (0, 0) High Price (5, -5) b. The cooperative (collusive) outcome can be sustained in the infinitely repeated game with the following trigger strategy: Cooperate provided no player has ever cheated in the past. If any player cheats, "punish" the player by choosing the oneshot Nash equilibrium strategy forever after. In particular, for this game we know 1 1 Cheat - Coop = 5 - 3 Coop - N = [ 3 - 0] = 30. i .1 [ ] The left-hand side of this equation represents the one-time gain of breaking the collusive agreement today. The right-hand-side represents the present value of what is given up in the future by cheating today. Since the one-time gain is less than the present value of what would be given up by cheating, players find it in their interest to live up to the agreement. c. By definition, a trigger strategy stipulates that each player uses the history of what its rival did to decide whether it should cooperate or not. Hence, whenever one player cheats last period, the rival of it should choose not to cooperate. In other words, history is very important. Managerial Economics and Business Strategy, 5e Page 25 3. You are considering entering a market serviced by a monopolist. You currently earn $0 economic profits, while the monopolist earns $5. If you enter the market and the monopolist engages in a price war, you will lose $5 and the monopolist will earn $1. If the monopolist doesn't engage in a price war, you will each earn profits of $2. a. Write out the extensive form of the above game. b. There are two Nash equilibria for the game. What are they? c. Is there a subgame perfect equilibrium? Explain. d. If you were the potential entrant, would you enter? Explain why or why not. Register to View AnswerThe extensive form is presented in Figure 10-3 below. PRICE W AR (-5, 1) IN CU M BE N T E N T ER (2, 2) N O PRICE W AR YOU D ON T EN TE R (0, 5) Figure 10-3 b. One Nash equilibrium is that you stay out; your rival engages a price war should you enter. Another Nash equilibrium is that you enter; your rival does not engage a price war if you enter. c. The second one is a perfect equilibrium, while the first one is not. This is because if you enter, the incumbent can get $2 profits by not engaging a price war, which is greater than $1 profits otherwise obtained by engaging a price war. The threat to engage in a price war is not credible. d. If you were the potential entrant, you should enter. You get $2 profits by entering, which is greater than the zero you earn by not entering. Page 26 Michael R. Baye 4. OPEC was an effective cartel for many years, but recently it has been unable to maintain a high price of oil. What factors do you think are contributing to the demise of OPEC? Answer: At least three factors account for the demise of OPEC. First, it is difficult for members to verify whether other countries are in fact living up to the collusive agreements. Secondly, as reserves of smaller countries diminish, the penalty to cheating members has been becoming increasingly ineffective and not large enough to deter cheating. Finally, several OPEC members have recently engaged in armed conflict, which has decreased the present value of future earnings derived from colluding. That is, a country that loses a war loses the future value of would-be collusive profits; to the victor go the spoils. 5. The NCAA prohibits schools that are caught paying athletes from participating in bowl games, and sometimes the punishment is even more severe. Explain why schools don't break away from the NCAA and form a league in which athletes can legitimately be paid. (Hint: Use hypothetical payoffs to construct an illustrative normal-form game in which the strategies are "pay players" and "don't pay players." Then analyze the game in one-shot and infinitely repeated contexts.) Answer: Pay Athletes Pay Athletes School A Don't Pay Athletes (0, 0) (-10, 10) School B Don't Pay Athletes (10, -10) (7, 7) The above hypothetical pay-off matrix shows that, in a one-shot game, each school has an incentive to pay athletes, in an attempt to obtain the best athletes and be assured of bowl revenues. But when all schools do this, athletes extract virtually all of the profits, and the schools are left with nothing. If schools "collude" and agree not to pay athletes, each school earns higher profits, since less money goes to the athletes. In an infinitely repeated game, the schools threaten to punish those who pay athletes by precluding them from participating in bowl games long enough to wipe out any gains to cheating. This can support the equilibrium where schools do better than they would by forming an independent league that permitted college athletes to be paid larger sums. Managerial Economics and Business Strategy, 5e Page 27 6. Based on your knowledge of one-shot and repeated games, would you expect tipping behavior to differ depending on whether a person is eating in a hometown diner or in a restaurant located in Timbuktu? Explain. Answer: Eating at the local diner is a repeated game: there is a high probability that the waiter at the local diner will serve you again and thus can "punish" you next time (by providing less service) if you don't tip today. In contrast, in Timbuktu, you play a one-shot game and have a reduced incentive to tip. 7. According to a spokesperson for cereal maker Kellogg, "... for the past several years, our individual company growth has come out of the other fellow's hide."1 a. What implications does this statement have for the level of advertising in the cereal industry? b. Using the following hypothetical payoff matrix, explain how trigger strategies can be used to support the collusive level of advertising in an infinitely repeated game. For what values of the interest can collusion be sustained? Firm B Strategy Advertise Firm A Advertise 4, 4 Don't advertise 1, 20 Don't Advertise 20, 1 10, 10 Register to View AnswerThe news implies that advertising increases the demand for a firm's product by taking customers away from other firms in the industry. The end result in a oneshot game is that cereal firms spend money on advertising, with no real change in their demand. b. The cooperative (collusive) outcome can be sustained in the infinitely repeated game with the following trigger strategy: Don't advertise provided no player has ever cheated in the past. If any player cheats, "punish" the player by advertising forever after. In particular, there is no incentive to cheat on this agreement if 1 1 6 Cheat - Coop = 20 - 10 Coop - N = [10 - 4] = . i i i [ ] Solving this for i, we see that for any interest rate less than or equal to 60 percent, there is no incentive to cheat. 1 See F.F. Scherer, "The Welfare Economics of Product Variety: An Application to the Ready-to-Eat Cereals Industry," Journal of Industrial Economics (December 1979). Page 28 Michael R. Baye 8. You are the manager of a firm that is "bargaining" with another firm over how much to pay for a key input your firm uses in production. Which type of bargaining would be "better" from your firm's point of view, simultaneous-move bargaining or take-itover-leave-it bargaining? Explain carefully. Answer: Sequential, take-it or leave-it bargaining is preferable for the manager if she has the first move advantage. This is because any proposal leaving a positive amount of money to labor will be acceptable to the other firm under this setting. 9. You are the manager of the ABC novelty store, and your only competitor is the XYZ novelty store. You are both trying to decide on which magic tricks and party favors to carry in stock. The product mixes available to both of you are low, medium, and high in variety. Your expected earnings in this market are shown in the following table. Strategy Low Firm ABC Medium High Firm XYZ Low Medium 100,100 150, 200 200, 75 125, 150 300, 200 100, 225 High 200, 300 225, 195 150, 250 a. Find the Nash equilibrium (or equilibria) for a simultaneous-move, one-shot play of this game. b. What outcome would you expect in this one-shot game? Why? Register to View AnswerThe only Nash equilibrium is that Firm ABC chooses medium while Firm XYZ chooses high. b. In a one-shot game, we expect the two firms to choose medium (Firm ABC) and high (Firm XYZ) to obtain 225 and 195 units of profit, respectively. 10. You are the owner-operator of the Better Gas Station in a small southeastern town. Over the past 20 years, you and your rival have successfully kept prices at a very high level. You recently learned that your competitor is retiring and closing his station in two weeks. What should you do today? Why? Answer: You'd better lower your price today; the game is now a finitely repeated game with a known end point, and collusion will no longer be sustainable with trigger strategies. Managerial Economics and Business Strategy, 5e Page 29 11. You are the manager of Copies Are Us. The only other copy store in town, the Carbon Copy, recently got bids on adding a color copier. You must decide whether to obtain a color copier, but you can base decision on what your rival does. If your rival adds a color copier and you don't, you expect your profits to fall by $1,000 per week and its profits to rise by $1,500 per week. Conversely, if you add the color copier and your rival does not, your profits will increase by $1,500 per week and your rival's profits will fall by $1,000 per week. However, if you both do the same thing (add color copies or not), you each expect profits to stay at their current level. Show the extensive form of this game, and find the Nash equilibrium (or equilibria). Is there a subgame perfect equilibrium? Answer: The extensive form game is shown in Figure 10-11. The subgame perfect Nash equilibrium is for both of you to add color copiers, to earn zero profits. (0, 0) Add You Add Carbon Copy (-1000, 1500) Add Don' t Add You Don' t Add (0, 0) Don' t Add (1500, -1000) Figure 10-11 Page 30 Michael R. Baye 12. You are the bargaining coordinator for Sun Car Manufacturers. At present you are renegotiating the labor contract with the union representative. You are bargaining over an expected 20 percent increase in earnings over the next three-year contract period. You are trying to decide whether to offer one-third, one-half, or all of the increase in earnings to the union. The union rules are such that all contracts must be voted on. The additional earnings are contingent on getting started on the new contract next week. If an agreement isn't reached on the first round of negotiations, the firm will go out of business. The union representative tells you that if you do not give the union all of the additional profits, the union members will not vote for the agreement. a. Show the extensive form of this game. b. What will you offer the union? Why? Register to View AnswerSee Figure 10-12. Union 33% You 50% 100% Union Yes No (0, 20%) (0, 0) Union Yes No (10%, 10%) (0, 0) Yes No (13.3%, 6.7%) (0, 0) Figure 10-12 b. The bargaining coordinator should offer 33% of the increase to the union. The union claims it will vote no if you do so, but by doing so, the firm will go bankrupt and the members will lose their jobs. Obviously, a 6.7 percent pay hike is preferable for the union; the Union's threat is not credible. Managerial Economics and Business Strategy, 5e Page 31 13. Would collusion be more likely in the shoe industry or in the airline industry? Why? Answer: The airline industry seems to be more likely to have collusion than the shoe industry because the former is more concentrated, sells more homogeneous products, has good records of customers, and has an easier opportunity to observe and punish cheaters. 14. According to various trade publications, over 200,000 changes are made in airfares each day. Why do you think this is the case? Answer: By randomizing prices it makes price shopping more costly to consumers, and reduces the ability of rivals to systematically undercut their fares. 15. Two executives were arrested by authorities for embezzling money from their firm. Short of a confession, the prosecutor only had enough evidence to put them away for 10 years. Given a confession, however, she was certain to put them behind bars for life without parole, since they killed a law enforcement officer who was investigating the case. The prosecutor put the two prisoners in separate rooms, and told them the following: "If you confess and your partner does not, I'll give you a year's probated sentence but put your partner in the slammer for life without parole. Of course, if your partner confesses and you don't, you'll get the life sentence without parole and he'll get one year's probation. I must warn you, however, that if you both confess I'll have enough evidence to put you both away for life without parole." a. Do you think the prosecutor's bargain will induce the two executives to confess? Explain. b. Would your answer change if the life sentence carried the possibility of parole? Explain. Register to View AnswerYes. Given no parole, this is a one-shot game and the dominant strategy for each executive is to confess. Notice that both end up with life sentences without parole. b. It might. If parole is a possibility, then the game is not a one shot game but a finitely repeated game with an uncertain end-point (the parole date). In this case, the executives might be able to successfully "collude" by not confessing -provided that each executive fears that his own confession will result in a sufficiently harsh punishment if the other executive gets paroled. Page 32 Michael R. Baye 16. In the early 1990s, there was considerable uncertainty in the computer industry about whether the dominant operating system for future personal computers would be IBM's OS/2 or Microsoft's Windows. Ultimately, Windows emerged as the dominant system despite the fact that several trade publications viewed OS/2 as the superior system. Why do you think this outcome prevailed? Answer: The problem of selecting an operating system can be thought of as a coordination game, in which it is often difficult to achieve a Nash equilibrium. Consider, for example, the decision by personal computer users to use Microsoft's Windows operating system or IBM's OS/2. If all other users decided to use Windows, then your best choice would also be to use Windows, even if you personally like the OS/2 environment. This is because there would be a much greater selection of software available if you used the same system that everyone else uses. On the other hand, if all other users decided to use OS/2, then your best choice would be to use OS/2, even if you personally like the Windows environment. Again, the reason is that you would have a much better selection of software if you use the system everyone else is using. One reason Windows ultimately prevailed is that consumers perceived that everyone else was opting for Windows. Managerial Economics and Business Strategy, 5e Page 33 17. You are the manager of XYZ Inc. and must decide how much output to produce to maximize your firm's profit. XYZ and its rival, ABC Corp., produce a good that consumers view as essentially identical. These two firms make up the entire industry, so the market price for the good depends on the total amount produced by the two firms. A survey reveals that the market price of the product depends on total market output as follows: Combined Output of XYZ and ABC 200 units 300 units 400 units Product Price $6 $5 $4 XYZ and ABC each use labor, materials, and machines to produce output. XYZ purchases labor and materials on an as-needed basis; their machines were purchased three years ago and are being depreciated according to the straight-line method. XYZ's accounting department has provided the following data about its unit production costs: Item Direct labor Direct materials Depreciation charge XYZ's Unit Cost for an Output of: 100 units 200 units $2 $2 $3 $3 $2 $1 Reports from industry experts suggest that ABC's cost structure is similar to XYZ's cost structure and that technological constraints require each firm to produce either 100 units or 200 units of output. a. Briefly explain which costs are relevant for your decision, and why. b. Write this game in normal form. c. How many units should XYZ produce: 100 units or 200 units? Register to View AnswerDirect labor and direct materials, since they are variable costs. Depreciation is a fixed (or sunk) cost, and is therefore irrelevant to the decision (the firm's fixed costs are $200, since $200/100 = $2 $200/200 = $1. These later numbers are the ones reported in the table). b. The payoff matrix (normal form) below shows the relevant contributions to overall profits (the sunk costs are irrelevant, remember!) for alternative levels of output by the two firms. The key is to note that if each firm produces 100 units, total market output is 200 units and the price is $6. XYZ's contributions in this case are ($6 - $5) x 100 = $100. If one firm produces 100 units and the other firm produces 200 units, the market price is $5. In this case, each firms contributions are zero (the price equals relevant unit costs of $5). If both firms produce 200 units, the market price is $4, and the contributions of each firm are ($4 - 5) x 200 = $ - 200. XYZ ABC Strategy 100 Units Page 34 100 Units ($100, $100) 200 Units ($0, $0) Michael R. Baye 200 Units ($0, $0) (-$200, -$200) c. The dominant strategy for XYZ is to produce 100 units -- regardless of what ABC does, XYZ is better off producing 100 units. Importantly, this is true regardless of whether the game is simultaneous move or sequential move. The same is true for ABC. Thus, if XYZ plays its dominant strategy it will contribute $100 towards it's fixed costs of $200. Any other strategy leads to lower contributions and even greater losses. 18. Two firms produce identical products at zero cost, and they compete by setting prices. If each firm charges a low price, the both firms earn profits of zero. If each firm charges a high price, then each firm earns profits of $30. if one firm charges a high price and the other firm charges a low price, the firm that charges the lowest price earns profits of $50 and the firm charging the highest price earns profits of zero. a. Which oligopoly model best describes this situation? b. Write this game in normal form. c. Suppose the game is infinitely repeated. Can the players sustain the "collusive outcome" as a Nash equilibrium if the interest rate if 50 percent? Explain. Register to View AnswerThe Bertrand model (Cournot and Stackelberg are models of quantity competition, and Sweezy assumes differentiated products). b. Strategy Low Price High Price Firm 2 Low Price (0, 0) (0, 50) High Price (50, 0) (30, 30) Firm 1 c. If it is possible to monitor the actions of rivals (and ignoring antitrust considerations), the collusive outcome can be sustained in the infinitely repeated game with the following trigger strategy: "Charge a high price provided no player has ever charged a low price. If any player charges a low price, `punish' the player by charging a low price forever after." There is no incentive to cheat 30(1 + 0.5) 50 < 90 . on this agreement since 50 < 0.5 Managerial Economics and Business Strategy, 5e Page 35 19. Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has discovered how to make superior chips and is considering whether or not to adopt the new technology. Adoption would entail a fixed setup cost of C but would increase revenues. However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of C/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn $0. If Intel adopts and AMD does likewise, each firm will earn $15 in revenues. If Intel does not adopt the new technology, it will earn $5 and AMD will earn $2. a. Write this game in extensive form. b. Under what conditions (i.e., for what values of C) does AMD have an incentive to adopt the new technology if Intel introduces it? c. If C = 12, should Intel adopt the new technology? Explain. Register to View Answer Ap d t o AMD Ap d t o Don't Adopt Intel D'Ap ot d t n o ( ,2 5 ) ( 5 C1 / ) 1- , 5 C 2 ( 0 C0 2- , ) Figure 10-19 b. AMD's payoff from adopting must exceed its payoff from not adopting. This is true if 15 C/2 > 0. Solving for C we find that AMD has an incentive to adopt if Intel adopts whenever C < 30. c. No. When C = 12, AMD's best strategy is to adopt if Intel Adopts, which means Intel would earn only 3 by adopting. By not adopting, Intel can earn a payoff of 5; Intel's best option is not to adopt. This is the only Nash equilibrium, and it is also a subgame perfect Nash equilibrium. Page 36 Michael R. Baye 20. Suppose Philips and Toshiba are the first companies to introduce digital versatile disk (DVD) machines to the market. Studies by the firms suggest that consumers who purchase consumer electronics are very brand-loyal. To capture future loyalties, each firm will attempt to maximize its initial market share, for one time only, by setting prices. An economist has estimated the initial market share of each firm under different pricing scenarios. Her results are captured in the following payoff matrix. Strategy P = $250 P = $500 P = $1,000 Toshiba P = $250 P = $500 60%, 40% 75%, 25% 25%, 75% 90%, 10% 5%, 95% 25%, 75% P = $1,000 95%, 5% 75%, 25% 70%, 30% Philips a. Given this scenario, if you were in charge of pricing at Philips, what price would you charge? Explain. b. What market share would you anticipate as a result of your pricing strategy? Explain. Register to View AnswerNote that Toshiba's dominant strategy is to charge a price of $250. Anticipating this, Philips should likewise charge a price of $250. This is the only Nash equilibrium to the game. b. You should anticipate a market share of 60 percent. Managerial Economics and Business Strategy, 5e Page 37

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January, 2003Managerial Economics ECO 9705 Spring 2003 Tuesdays and Thursdays, 6:00 7:15pm Prof. June Ellenoff O'NeillChapter 1 - Preliminaries Understand real versus nominal prices Microeconomics behavior of individual economic units, including consume
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Lecture 1 - Math Review.Lecture 1 - Math Review.Topics from Calculus you should know: How to define a derivative How to interpret f (x) = 2. What does that mean? How to calculate the derivative of:1 2 3Topics from Calculus you should know (cont.): The
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Problem Set 6 - Brief Solutions1. and 2. For both of these problems, the solution isp1 p2= 1.3. Solve for the demand of consumer 1 by setting 2x1 = x2 and 3x1 + x2 = 2x1 + 3x2 . The solution is a bit messy, but it's whatever ratio solves the equation:
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Problem Set 61. Consider the following exchange economy. There are two goods and two consumers. The first consumer has a utility function U1 (x1 , x2 ) = x x , and the second consumer has a utility function U2 (x1 , x2 ) = 1 2 x1 + x2 . Consumer 1 has an
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Fall 2005 Econ 414 midterm exam Take extra time to write complete answerssignificant points will be deducted for incomplete or unjustified answers. 1(a). Find all the pure strategy equilibria of the following game.(7 points) 1(b). Find the mixed strategy
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1(a). Find all the pure strategy equilibria of the following game. 1(b). Find the mixed strategy equilibrium of the same game. R R L (4,3) (0,2) L (6,2) (8,0)2. You and I are to play the following game. It starts with 3,657 pennies in the middle of the t
N.C. State - ECG - 700
L ?1ri\ t x-;, ^t^/(t - nt \ rcJ trlLveIIi)e.r^.,*tIIb.-&quot;$td*wgJcur,e &quot;^;L'K:-rl P&quot;'A'h ?1 1(t):.L&lt;-cuu-c\f=3P&quot; =,o5 \?f'&quot;1v@,Db xt ,.1 [tA)^l'\, c5x r , z K ' 3*K:V : t'\LLuT(U; @nu.-^)z.F . )'2.,lb n.&quot;r ,LX:) .35 K: 3
N.C. State - ECG - 700
Problem Set 41. 5.2 only need to do parts a, b, c, and e. (Problem starts &quot;David N. gets $3 per week .&quot;) 2. 5.4 (&quot;As in Example 5.1, assume .&quot;) 3. 5.12 (&quot;Quasi-linear utility (revisited)&quot;) 4. 6.1 (&quot;Heidi recieves utility from two goods, goat's milk.&quot;) 5.
N.C. State - ECG - 700
i t.&quot;),itI I- ()t :,\^t)c. \r)L ( ^,y, ^i)(,'L-. .-*--cfw_.V_ )__1* cfw_L\f p^.^,ly y - t )7Ic.)x.L*7I't\' P&quot;'- l-\ P.,( t.) ,\.,\i-r\ Ylrx K*IL)t\ . &quot;_-)jL-L,'YI., 1/,V'\-\-oIIt._':l .-PvYz(e)I:ri 1-I u. !t&quot;/)tI
N.C. State - ECG - 700
Problem Set 3 1. Suppose an individual's utility function is represented by the CES function: 1 1 U (x, y) = - - x y (a) Use the Legrangian multiplier method to calculate the uncompensated (Marshallian) demand functions for X and for Y. (b) Show that dema
N.C. State - ECG - 700
N.C. State - ECG - 700
Problem Set 2 - Preferences 3.1 You don't need to graph the curve, just determine whether or not an indifference curve is convex. In addition to the problems in the book, also do: f. U = X 2 + Y 2 1 2 g. U = X 3 Y 3 h. U = ln x + ln y 3.3 4.2 4.5 4.71
N.C. State - ECG - 700
Problem Set 1 - Calculus Review I. For each function, calculate the derivative with respect to x. a.f (x) = 17 b.f (x) = 5x3 c.f (x) = 3x 3 1 3 d.f (x) = x2 e.f (x) = ln(x ) f.f (x) = ex g.f (x) = 5e3x h.f (x) = x3 - 5x2 + 6x + 2 i.f (x) = x3 x5 j.f (x) =
N.C. State - ECG - 700
ECG 700 Midterm In order to receive full points, you must carefully and thoroughly justify your answers. Question 1 - 30 points 1 1 A person's utility is given by the Cobb-Douglass function u(x, y) = x 2 y 2 . (a) Show that the optimal demand functions fo
N.C. State - ECG - 700
Preferences.PreferencesPreferences Primitives: X : : : &quot;set of alternatives&quot; &quot;at least as good as&quot; (weakly preferred) (strictly preferred) (indifference) Closed and convex setRationality Assumptions1Completeness: x, y X , we have either x y x. Transi
N.C. State - ECG - 700
Chapter 3Preferences and UtilityNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Utility We can assume the individual is considering two goods, x and yutility = U(x,y)Economic Goods In the utility function, the x's
N.C. State - ECG - 700
Chapter 4Utility Maximization and ChoiceNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Marginal Rate of Substitution The negative of the slope of the indifference curve at any point is called the marginal rate of su
N.C. State - ECG - 700
Chapter 5Income and Substitution EffectsNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Demand Functions The optimal levels of x1,x2,.,xn can be expressed as functions of all prices and income These can be expressed
N.C. State - ECG - 700
Chapter 5Income and Substitution EffectsNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Changes in a Good's PriceQuantity of ySuppose the consumer is maximizing utility at point A. If the price of good x falls, the
N.C. State - ECG - 700
Games - IntroductionMost of classical microtheory is static. We assume that either a consumer's choices don't affect the prices she faces or else that she doesn't realize that she affects them. Similarly, a firm makes decisions about production as a resp
N.C. State - ECG - 700
Models of CompetitionA Cournot game with linear demand and constant marginal cost: Two firms, firm 1 and firm 2. Each firm chooses a quantity of a product to produce, q1 and q2 . Each unit costs c to produce, so the total cost of producing q units is q c
N.C. State - ECG - 700
Constrained OptimizationConstrained Optimization: Almost all of microeconomics can be described as constrained optimization: One definition of economics I've heard: Economics is the study of efficient allocations of scarce resources. Efficient means opti
N.C. State - ECG - 700
Differentiation - a quick reviewThe derivative generalizes to multiple dimensions in a straightforward way. x-i denotes all variable other than i. Definition Suppose f : Rn R. The partial derivative of a function: f (xi , x-i ) - f (x) f (x) = fi (x) = l
N.C. State - ECG - 700
Revealed Preference If (x*,y*) is chosen when (x',y') is available, we say that (x*,y*) is revealed preferred (x',y'). Often very helpful. You can never observe a person's utility function, but you can observe her choices.The Lump Sum Principle Taxes
N.C. State - ECG - 700
Marshallian Demand Elasticities Price elasticity of demand (ex,px)ex ,px x/x px / px x px px xMarshallian Demand Elasticities Income elasticity of demand (ex,I)e x ,I x/x I/I x I I x Cross-price elasticity of demand (ex,py)e x ,py x/x py / py x py
N.C. State - ECG - 700
Chapter 7Uncertainty and InformationNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Expected UtilityLottery 1: Win $500,000 with Probability 1 Lottery 2: Win $2,500,000 with Prob .1, $500,000 with prob. .89, and $0 w
N.C. State - ECG - 700
Chapter 7Uncertainty and InformationNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.St. Petersburg Paradox A coin is flipped until a head appears If a head appears on the nth flip, the player is paid $2nx1 = $2, x2
N.C. State - ECG - 700
Chapter 7Uncertainty and InformationNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Expected Utility Remember, preferences have expected utility form if there exists u1,.un such thatnE ( L)i 1pi ui Where L= p1,.
N.C. State - ECG - 700
Chapter 6Preferences and UtilityNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.The Two-Good Case The types of relationships that can occur when there are only two goods are limited But this case can be illustrated w
N.C. State - ECG - 700
Chapter 7Uncertainty and InformationNicholson and Snyder, Copyright 2008 by Thomson South-Western. All rights reserved.Mathematical Statistics A random variable is a variable that records, in numerical form, the possible outcomes from some random even
N.C. State - ARE - 201
ECG 561, Intermediate Econometrics, Spring 2008 Study Questions for Midterm II Consider the following multiple regression: yi = + 1x1i + 2x2i + ui, where the basic assumption about the error term hold. Describe in detail how you could test the following h
N.C. State - ARE - 201
Study Questions for Midterm 1 ECG 561, Spring 2008 1. Consider two discrete random variables, X and Y. Their joint probability distribution is given in the table below: X 0 0 Y 1 a. b. c. d. 0 1/3 1/3 1/3 1 0 2 0Are X and Y independent? Support your answ
N.C. State - ARE - 201
Review questions for ECG 561 final exam - Spring 20085.6. You have a data set on 3,000 golf scores for professional golfers from tournaments in a single year. You are interested in the effect of prize money on scores and, in addition, are interested in
N.C. State - ARE - 201
Lecture 14: Regulation, Safety, and Equity I. Other roles of government in the economy 1. 2. 3. 4. enforce property rights anti-trust income redistribution regulating business and consumer choicesII. Enforce property rights 1. means to protect ownership
N.C. State - ARE - 201
Lecture 13: Public Goods 1. Thus far we have been talking about private goods, which are products and services that, once an individual consumes them, their use or consumption is not available to others (examples: if I eat a hamburger, that hamburger is n
N.C. State - ARE - 201
Lecture 12: Externalities 1. Market failure occurs when an action creates costs or benefits to others, and the creator of the action is not charged for the cost or paid for the benefit. Examples: You drive a vehicle (action) which emits some pollutants, b
N.C. State - ARE - 201
Lecture 11: Taxes 1. Average Tax Rate = taxes paid divided by income of taxpayer For U.S., average tax rate is around 30% 2. Marginal Tax Rate = change in taxes paid divided by change in incomeFor a &quot;flat tax&quot;, where all income is taxed at the same rate,
N.C. State - ARE - 201
Lecture 10: International Markets I. Why trade with other countries? Same reasons people trade with each other - because it's beneficial to do so. But two specific reasons when looking at international trade 1. Absolute Advantage: Consider countries A and
N.C. State - ARE - 201
Lecture 9: Market Change 1. Markets are rarely &quot;in equilibrium&quot;. Something is always changing to change demand or supply (remember the &quot;factors&quot; we talked about that shift the demand and supply curves). One real benefit of economics is helping predict wha
N.C. State - ARE - 201
Lecture 8: Buyers and Sellers Put demand and supply together to get &quot;equilibrium price&quot; - price at which the quantity of the product or service (often called a &quot;good&quot;) desired to be purchased by buyers exactly equals the quantity of the product or service
N.C. State - ARE - 201
Lecture 7: Market Structure I. Perfect Competition1. A &quot;perfectly competitive&quot; market has the following characteristics: * each business sells the exact same product * each business is relatively small and can't affect the price of the product * each bus
N.C. State - ARE - 201
Profit Maximization by the Firm SITUATION 1: PRICE TAKER - firm has no control over price, and takes price as given objective of firm is to sell the amount of output that will maximize its profits Way 1: Calculate profit at alternative production level; g
N.C. State - ARE - 201
Lecture 6: Price and Revenue Elasticity 1. Although demand curves are downward sloping and supply curves are upward sloping, their degree of &quot;steepness&quot; or &quot;flatness&quot; can vary. 2. What does this mean? A &quot;steep&quot; demand curve, like:120 100 80 price 60 40 2
N.C. State - ARE - 201
Lecture 5: Costs and Producing 1. Types of business organizations sole proprietorship: one owner runs everything partnership: multiple owners corporation: shareowners own the business; shares can be bought and sold; shareholders hire a CEO (chief executiv
N.C. State - ARE - 201
Lecture 4: InvestingI. Why Invest? To transfer resources to the future and at least keep pace with inflation. Inflation erodes the purchasing power of dollars - if keep &quot;money in a mattress&quot;, it loses value. II. What Do You Look for When You Invest? Want
N.C. State - ARE - 201
Lecture 3: Earning 1. First, background on a &quot;supply curve&quot; - shows how much is produced, or offered, of something compared to price of that something. Idea is, if producers can receive more from the price, they'll want to produce and sell more. Can also
N.C. State - ARE - 201
Lecture 2: Buying I. We buy things because they help us live and make us happy. Economists use a catchall term, utility, to mean the benefit we get from buying something. II. Most of us &quot;want&quot; or &quot;need&quot; more than we can afford. In economics, we bring &quot;wan
N.C. State - ARE - 201
Lecture 1: What Is Economics? I. The Economic Problem: There are scarce resources but unlimited potential uses of those resources. This scarcity forces tradeoffs between resource use. Who is to decide how to allocate scarce resources? Who decides what is
N.C. State - ARE - 201
ARE 201 Fall 2009, Test 2Name _KEY_I. Complete the sentence or provide the short answer on the answer sheet. 1. Business costs unrelated to how much output is produced are called fixed costs. 2. Business costs that change as the amount of output changes
N.C. State - ARE - 201
ARE 201 Fall 2009 Test 1Name _KEY_I. Complete the sentence or provide the short answer on the &quot;answer sheet&quot;. 1. An economy in which a central authority decides what is produced and who receives what amount of products and services is called a _command_
N.C. State - ARE - 201
ARE 201 Name _KEY_ Lab #5 Compete the sentence or work the problem. 1. Total taxes paid divided by the taxpayer's income is the _average_ tax rate. 2. The change in taxes paid divided by the change in the taxpayer's income the marginal_ tax rate. 3. Gross
N.C. State - ARE - 201
Lab 4 ARE 201, Fall 2009Name _KEY_1.Below are the total costs for each possible monthly production level of couches made by Tarheel Furniture Company. If Tarheel Furniture Company is a price-taker and the current price is $400 per couch, calculate the
N.C. State - ARE - 201
ARE 201 Fall 2009 Complete each sentence.Lab 31.The objective of a firm in a market economy is to maximize _profits_.2.Profits = _Revenues_ minus costs.3. Profit-seeking firms usually can offer products at lower prices than nonprofit firms because p
N.C. State - ARE - 201
ARE 201 Name _KEY_ Fall 2009 Lab # 2 Complete the sentences or provide the short answer.1. If pizza and beer are complements, then an increase in the price of beer will _decrease_ the purchases of pizza. 2. In Micro Mischief, Dia appears on a radio talk
N.C. State - ARE - 201
ARE 201 Fall 2009 Lab #1Name _KEY_Work the problems and show all your calculations. Use the attached table if necessary. Give answers to the nearest dollar, except #1 - give dollars and cents. 1. Calculate the real value in 2009 (in 2009 purchasing powe
N.C. State - ARE - 201
Chapter 1 to Chapter 9 See the study guides for previous chapters. Chapter 10 1. What is externality? What is negative externality and what is positive externality? What is the effect of an externality on economic efficiency? 2. When we have a negative ex
N.C. State - ARE - 201
ARE 201 Spring 2009 Sample Final Exam Answer Sheet MULTIPLE CHOICE (2 points each) 1. c 2. d 3. c 4. c 5. c 6. c 7. a 8. c 9. b 10. b 11. b 12. b 13. c 14. a 15. a 16. c 17. a 18. b 19. b 20. d 21. b 22. c 23. b 24. b 25. c 26. c 27. b TRUE/FALSE (2 point