BS2242 Principles of Micro Economics January 2015-6

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Page 11 of 11 This examination is subject to Examination Regulations for Candidates 2016 SECOND YEAR JANUARY EXAMINATION PAPER BS2242 PRINCIPLES OF MICRO ECONOMICS Q4. Two competing restaurants are opening next door to one another, on the same night. The restaurants are called “Carluccio’s” and “Trevor’s Place”. Carluccio’s have already announced that they will be a high quality fine-dining restaurant, and they have already committed to buying high quality ingredients. Trevor’s Place needs to make two decisions. First, they need to decide whether to buy high quality ingredients or low quality ingredients. Then, they need to decide whether to charge a high price or a low price. They will buy their ingredients now, but they will announce their p rices at the same time as their rival Carluccio’s - on opening night. If Trevor’s Place buys high quality ingredients, then it finds itself playing a game that will yield the following payoffs: Carluccio’s High Price Low Price Trevor’s Place High Price £2000, £2000 -£2000, £4000 Low Price £4000, -£2000 £0, £0 If Trevor’s Place buys low quality ingredients, then it finds itself playing a game that will yield the following payoffs: Carluccio’s High Price Low Price Trevor’s Place High Price -£1500, £6000 -£2500, £5000 Low Price £1500, £5000 -£3500, £4000 The payoffs are profits (or losses) on opening night. a) Draw the extensive form representation of this game. b) Identify the Nash equilibrium or equilibria. What decisi ons should Trevor’ s Place make? Explain your answer. (20 marks) END OF PAPER
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