Problem 1. The following table shows the expected value and variance for 5 projects a firm can undertake.
|
Project
|
Expected Value
|
Variance
|
|
A
|
$100
|
$124
|
|
B
|
$220
|
$110
|
|
C
|
$100
|
$138
|
|
D
|
$180
|
$138
|
|
E
|
$200
|
$124
|
a. Project B dominates all others. True or False? Why? .
b. Project C is the least preferable. True or False? Why?
c. If the mean-variance rule is used for the decision, project D is preferable to C. True or False? Why?
Problem 2. If firms in a perfectly competitive industry are earning an economic profit, product price will ____ because ____ . After long-run competitive equilibrium comes about there will be ____ (fewer, more, the same number of) firms in the industry and the industry will produce _____ (less, more, the same amount of) output. In long-run competitive equilibrium each firm will earn ______ economic profit.
Problem 3. Sony and Zenith must each decide which technology to utilize in building their high definition television (HDTV) sets: either Alpha technology or Beta technology. Sony has a technological advantage in using Alpha technology and Zenith has a technological advantage in using Beta technology. The payoff table below shows the profit outcomes for both firms in the various possible technology choice outcomes:
|
|
|
Zenith
|
|
|
|
Alpha
|
Beta
|
|
Sony
|
Alpha
|
A
$16 $12
|
B
$11 $10
|
|
Beta
|
C
$9 $8
|
D
$13 $15
|
|
Payoffs in billions of
|
Suppose the technology decision between Alpha and Beta will be made simultaneously. Answer the following questions:
a. Does Sony have a dominant strategy? If yes, which one? If not, why not? Explain.
b. Does Zenith have a dominant strategy? If yes, which one? If not, why not? Explain.
c. Identify the Nash equilibrium (equilibria) for this simultaneous decision. Explain.