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Tutorial 5 (Week 7)

# Tutorial 5 (Week 7) - EC1301 10/11 Semester 1 EC1301...

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EC1301 10/11 Semester 1 1 EC1301 Tutorial Discussion 5 (Week 7) 1. Consider the market for air travel between Singapore and Penang. The long-run average cost is constant at \$200 per passenger, and the demand curve is linear, with a slope of -\$1 per passenger. A secure monopolist would charge a price of \$280 and serve 70 passengers per day. The other possible prices are \$260 for an insecure monopolist, \$250 for the duopoly outcome, and \$170 for the case in which one airline picks a large quantity and a low price but a second airline enters anyway. a. Describe the game using a diagram and a game tree [first one like Figure 13.7 (page 38 in lecture slide) and the second one like Figure 13.8 (page 41 in lecture slide) in your text] b. Use your second figure to predict the outcome of the entry deterrence game. What is the price of air travel? 2. Your firm sells a very popular children’s toy. The manager of another firm is thinking about introducing a similar toy. Your average cost of production is constant at \$2 per toy. At the current monopoly price of \$5 per toy, you sell 120 toys per day. You

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