HW #2 - Homework #2. Due February 20. 1. The Ulysses...

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Homework #2. Due February 20. 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? b. Should Xenophon engage in high or low advertising? c. Does either firm have a dominant strategy? A dominated strategy? Explain. d. Is there a Nash equilibrium outcome? Explain. 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
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HW #2 - Homework #2. Due February 20. 1. The Ulysses...

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