Mock Final Exam answers

A assuming that andrew has to first purchase books

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Unformatted text preview: onger rational. If it does entre, however, $ony and Macrosoft can still choose to wage a price war, or just accommodate in case of an entry (without the extra investment in marketing). $ony & Macrosoft Nintendog Accommodate Price war Entre 40, 60 -10, 40 Don't entre 0, 100 0, 100 Assuming the marketing investment shrinks the combined benefit of $ony & Macrosoft by 10, draw a tree-diagram of the sequential game. Then, highlight the Stackelberg outcome. (10pt) Answer: Entre X, 50 (X<0) Invest Nintendog { Don't entre 0, 90 (Stackelberg outcome) $&M{ Entre 40, 60 Don't invest Nintendog { Don't entre 0, 100 4. Asymmetric Information Annie opens a pet shop and hires Jonathan as her manager, so that she can spend her time playing Candy Crush. The market has constant (inverse) demand schedule of P=30-2Q. The shop has supply function given by C=X+3Q, where X is a variable that depends on Jonathan's effort and luck, which are in turn given by the following table: Bad Luck (50%) Good Luck (50%) Cost of Effort Low Effort 50 25 0 Medium Effort 30 15 3 High Effort 10 5 5 The supply function does not include Jonathan's pay. $ony Annie has the option to give Jonathan one of the following pays: $10 fixed pay, 30% profit share, or 40% of the revenue above $40. How should Annie play him to maximize her profit? (15pt) Answer: Equating demand and supply, we obtain Q=6-X/5, and hence the following table: Quantity= Bad Luck (50%) Good Luck (50%) Low Effort -4 1 Medium Effort 0 3 High Effort 4 5 Subsequently, we obtain the price at each supply level, the firm's revenue and profit: Price= Bad Luck (50%) Good Luck (50%) Low Effort n/a $28 Medium Effort $30 $24 High Effort $22 $20 Revenue= Bad Luck (50%) Good Luck (50%) Low Effort n/a $28 Medium Effort $0 $72 High Effort $88 $100 Profit= Bad Luck (50%) Good Luck (50%) Low Effort n/a $2 Medium Effort $0 $14 High Effort $24 $38 For fixed pay, Jonathan will put in minimum effort to maximize his own payoff. For the other two, Jonathan's payoffs are given below: 30% share: Bad Luck (50%) Good Luck (50%) Cost of Effort Low Effort 0 0.6 0 Medium Effort -3 1.2 3 High Effort 2.2 6.4 5 40% revenue Bad Luc...
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