ECMC02-PS5 - UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT...

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UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT OF MANAGEMENT ECMC02: Topics in Price Theory (Intermediate Microeconomics II) Problem Set-5 Pindyck et al . Chapter-13: 5, 6, 7 Supplemental: 1. Consider two firms, X and Y that produce super computers. Each can produce the next generation super computer for the military (M) or for civilian research (C). However, only one can successfully produce for both markets simultaneously. Also, if one produces M, the other might not be able to successfully produce M, because of the limited market. The following payoff matrix illustrates the problem. a) Find the Nash equilibrium, and explain why it is a Nash equilibrium. b) If Firm X were unsure that the management of Firm Y were rational, what would Firm X choose to do if it followed a maximin strategy? What would both firms do if they both followed a maximin strategy? 2. Mitchell Electronics produces a home video game that has become very popular with children. Mitchell u s managers have reason to believe that Wright Televideo Company is considering entering the market with a competing product. Mitchell must decide whether to set a high price to accommodate entry or a low, entry-deterring price. The payoff matrix below shows the profit outcome for each company under the alternative price and entry strategies. Mitchell u s profit is entered before the comma, and Wright u s is after the comma.
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a) Does Mitchell have a dominant strategy? Explain. b) Does Wright have a dominant strategy? Explain. c) Mitchell u s managers have vaguely suggested a willingness to lower price in order to deter entry. Is this threat credible in light of the payoff matrix above? d) If the threat is not credible, what changes in the payoff matrix would be necessary to make the threat credible? What business strategies could Mitchell use to alter the payoff matrix so that the threat is credible? 3. Toyota and Nissan are in a “game” trying to determine who will build a plant in New
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ECMC02-PS5 - UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT...

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