Week 11 - TUTORIAL 10 WEEK 11 THINKING STRATEGICALLY...

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

View Full Document Right Arrow Icon
TUTORIAL 10 WEEK 11 THINKING STRATEGICALLY EXTERNALITIES Reading Text: Ch 11(pp294-303) Ch.12 (pp322-333) Ch 11 Review Questions: 1 and 3 1 Each contestant in a military arms race faces a choice between maintaining the current level of weaponry or spending more to increase it. In this situation, each side seems to view military superiority as the best possible outcome. The worst possible outcome from each side’s point of view is military inferiority. Of the other two combinations – both sides maintaining their current spending, or both sides spending more – each nation would prefer the former, since both result in military parity. Assuming the contestants are the USA and the former USSR, these rankings give rise to the following payoff matrix. Each side’s dominant strategy is to spend more on weapons, yet the result when each side spends more is less attractive than if each side had held spending at current levels. USSR USA Spend more on weapons Spend the same on weapons Second best for each Third best for each Best for USSR Worst for USA Best for USA Worst for USSR Spend the same on weapons Spend more on weapons 3 Once the firm buys the specialised capital equipment, it becomes a sunk cost, since it cannot be used to serve any buyer other than Holden. With no prior agreement about the price of the door handles, Holden would then be in a position to offer a price greater than the marginal cost of making the door handles, but too low to enable the firm to recover its capital costs. At that point, after all, Holden knows that the firm would be better off accepting the offer than refusing it. To guard against this possibility, the firm will want to sign a long-term contract specifying the price of the door handles before it invests in specialised capital equipment.
Background image of page 1

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

View Full DocumentRight Arrow Icon
Problems: 1, 2, 3, 6, and 7 1 a All others Sam -5 for Sam -5 for others -6 for Sam 10 for others 10 for Sam -6 for others -1 for Sam -1 for others Study a lot Study a little Study a lot Study a little b All study a lot and receive an average grade. From the students’ perspective, for
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 / 5

Week 11 - TUTORIAL 10 WEEK 11 THINKING STRATEGICALLY...

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