242s01q3

# 242s01q3 - soda at \$1 Their payoffs(profits in millions of dollars are Pepsi Comply \$1 Cheat 75¢ Coke Comply \$1 6 7 2 8 Cheat 75¢ 7 3 5 4 a Is

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ECONOMICS 242 QUIZ 3 SPRING 2001 PLEDGE:____________________________ NAME:______________________________ 1. (6 points) Consider two prisoner’s dilemma games that are played repeatedly. In the first, both players know that the game will end after 10 rounds. In the second, neither player knows how long the game will last. Why are the players more likely to play the cooperative strategies in the second game than in the first? 2. (3 pts) In order for strategic action to occur in an industry, there must be a high Herfindahl Index and a high Concentration Ratio. Define one of these two terms. 3. (4 pts) Suppose that a donor promises to give the college \$22 million in 20 years. If the interest rate is 8%, then the present value of the \$22 million is:

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4. (7 pts) Suppose that Coke and Pepsi are playing the following game. They can either charge 75¢ or \$1 for a bottle of soft drink. Given their desire to keep prices in a multiple of 25¢, these are their only two options. They have gotten together and secretly (because doing this is illegal) set the price of
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Unformatted text preview: soda at \$1. Their payoffs (profits in millions of dollars) are: Pepsi Comply: \$1 Cheat: 75¢ Coke Comply: \$1 6, 7 2, 8 Cheat: 75¢ 7, 3 5, 4 a. Is this game a Prisoner’s Dilemma? Explain why. b. Suppose that the companies are playing this game for three years. At the end of this time, they know that the government will begin regulating the industry, thereby eliminating the strategic interaction between them. Suppose also that Pepsi has credibly committed to playing a grim strategy . i. If the interest rate is 10%, fill in the rest of the following table: Present value of Coke’s Payoffs 1 st Year Comply: 6 Comply: 6 Comply: 6 Cheat: 7 2 nd Year Comply: 5.45 Cheat: _____ Comply: ____ Cheat: 4.56 3 rd Year Comply: 4.96 Cheat: _____ Cheat: _____ Cheat: _____ Total 16.41 ______ ______ ______ ii. Which strategy should Coke follow? (A strategy in this case is an action that Coke will take in each year.) Explain briefly how you reached this conclusion....
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## This test prep was uploaded on 04/22/2008 for the course ECON 242 taught by Professor Nonnenmacher during the Spring '06 term at Allegheny.

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242s01q3 - soda at \$1 Their payoffs(profits in millions of dollars are Pepsi Comply \$1 Cheat 75¢ Coke Comply \$1 6 7 2 8 Cheat 75¢ 7 3 5 4 a Is

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