HW#2 solutions - Homework #2. 1. The Ulysses Corporation...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Homework #2. 1. The Ulysses Corporation and the Xenophon Corporation are the only producers of a very sophisticated digital camera. They can each engage in either a high or low level of advertising in trade journals. Xenophon projects that if they do a high level of advertising then they will earn about $11 million if Ullyses also does a high level of advertising, but they will earn $12 million if Ullyses does low-level advertising. On the other hand, Xenophon expects to earn about $13 million if they do low level advertising and so does Ullyses, but they think that if they do low-level advertising and Ullyses does high level advertising then they will earn $12 million. Ullyses projects that if they do high advertising then they will earn $13 million if Xenophon does low advertising, and they will earn $12 million if Xenophon does high advertising. On the other hand, Ullyses expects to earn $11 million if they do low advertising and Xenophon does high advertising, and $12 million if Xenophon also does low advertising. a. Should Ullyses engage in high or low advertising? Yes, H is dominant strat. b. Should Xenophon engage in high or low advertising? L is dominant strat. c. Does either firm have a dominant strategy? H for Ullyses and L for Xenophon. Other choice is dominated for each (L for Ullyses and H for Xenophon). d. Is there a Nash equilibrium outcome? (L,H) X,U L H L 13,12 12,13 Nash Eq. H 12,11 11,12 2. Two firms, DR and TS, make identical goods and sell them in the same market. The demand in the market each year is Q = 1200 - P. Once a firm has built capacity, it can produce up to its capacity each period with a marginal cost of MC = 0. Building a unit of capacity costs 2400 (for either DR or TS). A unit of capacity lasts four years and has no salvage value. The interest rate is zero. Once production occurs each period, the price in the market adjusts to the level at which all production is sold. (In other words, these firms engage in quantity competition, not price competition). a) If DR and TS could collude before they built capacity, how much capacity would they build? They would jointly produce monopoly output: P=1200-Q
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
So, TR=(1200-Q)*Q MR=1200-2Q MC=600 per period. MR=MC: 1200-2Q=600 Q*=300. So, they jointly build 300 units of capacity, presumably each building 150 units of capacity. Alternatively, consider all four periods at once: TR=4*(1200-Q)*Q=4800-4Q 2 MR=4800-8Q MC=2400 MR=MC: 4800-8Q=2400 Q*=300. So, they jointly build 300 units of capacity, presumably each building 150 units of
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

HW#2 solutions - Homework #2. 1. The Ulysses Corporation...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online