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# chap013 - Chapter 13 Answers to Questions and Problems 1 a...

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Chapter 13: Answers to Questions and Problems 1. a. 16 units. b. Note that P = \$200, AC = \$180, and Q = 16, so profits are (\$200 - \$180)(16) = \$320. c. Yes; if it can credibly commit to a higher output it will earn even greater profits. 2. a. \$10 \$40 \$90 .2 D MD M i million. b. 2 1 1 1 1 .2 ... \$8 \$48 1 1 .2 L L L L L i i i i million. Since this is less than the profits obtained if entry occurs, the firm should not engage in limit pricing. 3. a. The simultaneous-move equilibrium is (Yes, Yes), and Player 1 earns \$200 in this equilibrium. By going first player 1’s best strategy is to commit to “No.” Player 2’s best response would be “No”, and thus Player 1 would earn \$350 by going first. The maximum amount Player 1 should pay for going first is this \$150 (or perhaps \$149.99). Importantly, this assumes Player 1’s move is observed by Player 2 before Player 2 makes her decision. b. Player 2 gets \$200 when Player 1 goes first, compared to \$225 when they move at the same time. Thus, player 2 would be willing to pay up to \$25 to keep player 1 from moving first. 4. a. A network with 10 users provides 10(10 - 1) = 90 potential connection services. b. No. Revenues will be \$1,000 which is well short of the \$6,000 in costs. c. Yes. With 90 connection services, each consumer will pay \$900 to join the network. Since there are 10 consumers, total revenues are \$9,000. This exceeds the \$6,000 required to build the network. d. The number of potential connection services increases by 20 to 110. 5. a. Two examples include tactics that raise distribution costs or increase the price of inputs. b. No. The benefits stem from the fact that by raising rivals’ costs, your rivals reduce their own output. This tends to increase the market price, thus permitting you to expand your own output (and market share) to enjoy higher profits. Managerial Economics and Business Strategy, 7e Page 1

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Page 2 Michael R. Baye
6. a. Firm 2 will enter so Firm 1 earns profits of \$300 thousand. b. By eliminating the fee, Firm 2 still has an incentive to enter. Firm 1 earns profits of \$340 thousand. c. The \$300 thousand increase in the medallion fee eliminates Firm 2’s incentive to enter (since its profits are -\$100 thousand upon entry). Since Firm 2 does not enter, Firm 1 earns profits of \$400 thousand.

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