242q1s02

# 242q1s02 - indicating their strategies and payoffs Find the...

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ECONOMICS 242 QUIZ 1 SPRING 2002 PLEDGE:____________________________ NAME:______________________________ 1. (10) In your neighborhood there is one supermarket and one gas station. At the moment, the profits of the supermarket owner are around \$8000 per month and the gas station's profits are only \$2000 per month. The gas station owner knows that he can make greater profits if he opens a convenience store, but also knows that the supermarket owner won’t be happy about that decision. If the supermarket responds by entering a price war with the convenience store, the supermarket will make \$2000 per month in profits and the convenience store will make \$400 in profits. If the supermarket responds by not entering a price war, then the supermarket will make profits of \$3000 and the convenience store will make profits of \$6000. The gas station owner wants your advice as to whether she should open a convenience store. a. Draw a game tree with the two players (supermarket and gas station),

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Unformatted text preview: indicating their strategies and payoffs. Find the rollback equilibrium. Write out the complete equilibrium strategy of both players. b. What is your advice to the gas station owner? Why? 2. (3) Rational behavior on the part of economic actors means that a. Actors try to maximize their monetary wealth. b. Actors try to make themselves better off than their competition c. Actors are perfect calculators and flawless followers of their best strategies. d. Actors usually follow their best strategies, but sometimes don’t. 3. (3) Is the game that you played in question 1 a zero-sum game? Explain why or why not. 4. (4) Don is deciding whether to invest in a new company. He thinks there’s a 20% probability that he’ll make \$10,000, a 30% probability that he’ll make \$5000, a 40% probability that he’ll make nothing, and a 10% probability that he’ll lose \$30,000. His expected payoff from the investment is:...
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242q1s02 - indicating their strategies and payoffs Find the...

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