Scribd
Upload
13 views3 pages

Solutions To Final Study 2015

Uploaded by

fungilism
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
13 views3 pages

Solutions To Final Study 2015

Uploaded by

fungilism
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

1. Two competing firms are each planning to introduce a new product.

Each will
decide whether to produce Product A, Product B, or Product C. They will make
their choices at the same time. The resulting payoffs are shown below.
We are given the following payoff matrix, which describes a product introduction
game:

Firm 2

A B C

A -10,-10 0,10 10,20


Firm 1 B 10,0 -20,-20 -5,15

C 20,10 15,-5 -30,-30

a. Are there any Nash equilibria in pure strategies? If so, what are they?
There are two Nash equilibria in pure strategies. Each one involves one firm
introducing Product A and the other firm introducing Product C. We can write
these two strategy pairs as (A, C) and (C, A), where the first strategy is for
player 1. The payoff for these two strategies is, respectively, (10,20) and
(20,10).
b. If both firms use maximin strategies, what outcome will result?
Recall that maximin strategies maximize the minimum payoff for both players.
For each of the players the strategy that maximizes their minimum payoff is A.
Thus (A,A) will result, and payoffs will be (-10,-10). Each player is much worse
off than at either of the pure strategy Nash equilibrium.

2. Sal’s satellite company broadcasts TV to subscribers in Los Angeles and New


York. The demand functions for each of these two groups are
QNY = 60 – 0.25PNY QLA = 100 – 0.50PLA
where Q is in thousands of subscriptions per year and P is the subscription price per
year. The cost of providing Q units of service is given by
C = 1,000 + 40Q
where Q = QNY + QLA.
a. What are the profit-maximizing prices and quantities for the New York and
Los Angeles markets?
We know that a monopolist with two markets should pick quantities in each
market so that the marginal revenues in both markets are equal to one another
and equal to marginal cost. Marginal cost is $40 (the slope of the total cost
curve). To determine marginal revenues in each market, we first solve for price
as a function of quantity:
PNY = 240 - 4QNY and
PLA = 200 - 2QLA.
Since the marginal revenue curve has twice the slope of the demand curve, the
marginal revenue curves for the respective markets are:
MRNY = 240 - 8QNY and
MRLA = 200 - 4QLA.
Set each marginal revenue equal to marginal cost, and determine the profit-
maximizing quantity in each submarket:
40 = 240 - 8QNY, or QNY = 25 and
40 = 200 - 4QLA, or QLA = 40.
Determine the price in each submarket by substituting the profit-maximizing
quantity into the respective demand equation:
PNY = 240 - (4)(25) = $140 and
PLA = 200 - (2)(40) = $120.
b. As a consequence of a new satellite that the Pentagon recently deployed,
people in Los Angeles receive Sal’s New York broadcasts, and people in New
York receive Sal’s Los Angeles broadcasts. As a result, anyone in New York
or Los Angeles can receive Sal’s broadcasts by subscribing in either city.
Thus Sal can charge only a single price. What price should he charge, and
what quantities will he sell in New York and Los Angeles?
Given this new satellite, Sal can no longer separate the two markets, so he now
needs to consider the total demand function, which is the horizontal summation
of the LA and NY demand functions. Above a price of 200 (the vertical intercept
of the demand function for Los Angeles viewers), the total demand is just the
New York demand function, whereas below a price of 200, we add the two
demands:
QT = 60 – 0.25P + 100 – 0.50P, or QT = 160 – 0.75P.
Rewriting the demand function results in

Now total revenue = PQ = (213.3 – 1.3Q)Q, or 213.3Q – 1.3Q2, and therefore,


MR = 213.3 – 2.6Q.
Setting marginal revenue equal to marginal cost to determine the profit-
maximizing quantity:
213.3 – 2.6Q = 40, or Q = 65.
Substitute the profit-maximizing quantity into the demand equation to
determine price:
65 = 160 – 0.75P, or P = $126.67.
Although a price of $126.67 is charged in both markets, different quantities are
purchased in each market.
and

Together, 65 units are purchased at a price of $126.67 each.


c. In which of the above situations, (a) or (b), is Sal better off? In terms of
consumer surplus, which situation do people in New York prefer and which do
people in Los Angeles prefer? Why?
Sal is better off in the situation with the highest profit. Under the market
condition in 8a, profit is equal to:
 = QNYPNY + QLAPLA - (1,000 + 40(QNY + QLA)), or
 = (25)($140) + (40)($120) - (1,000 + 40(25 + 40)) = $4,700.
Under the market conditions in 8b, profit is equal to:
 = QTP - (1,000 + 40QT), or
 = (126.67)(65) - (1,000 + (40)(65)) = $4633.33.
Therefore, Sal is better off when the two markets are separated.
Consumer surplus is the area under the demand curve above price. Under the
market conditions in 8a, consumer surpluses in New York and Los Angeles are:
CSNY = (0.5)(240 - 140)(25) = $1250 and
CSLA = (0.5)(200 - 120)(40) = $1600.
Under the market conditions in 8b the respective consumer surpluses are:
CSNY = (0.5)(240 – 126.67)(28.3) = $1603.67 and
CSLA = (0.5)(200 – 126.67)(36.7) = $1345.67.
The New Yorkers prefer 8b because the equilibrium price is $126.67 instead of
$140, thus giving them a higher consumer surplus. The customers in Los
Angeles prefer 8a because the equilibrium price is $120 instead of $126.67.

You might also like