Assignment:
1) Two companies, autodrone and remote devices control the market for personal drones. The companies are currently studying the possibility of expanding their factories. Research has provided them with the following costs/payoffs for expanding or not expanding their factories.
• To expand their factories, it will cost their companies $25 million.
• If both companies expand, they must pay the cost but will receive no ($0) benefit.
• If one company expands and the other does not:
o The one who expands must pay the cost of expansion but will gain $75 million in additional revenue from expansion while...
o The one who does not expand does not pay the cost but will lose $75 million in business to their rival.
• If neither company expands they both pay no cost and receive no benefits.
a) Create a payoff matrix for this game between autodrone and remote devices. (Be sure to include all costs and benefits of their choices in the payoff matrix).
b) What, if any, is autodrones dominant strategy?
c) What, if any, is remote devices dominant strategy?
d) If they were not able to collude, what is the likely outcome of this game? Why? What is this called?
e) If the companies were to collude, what is the likely outcome of this game? Why?
2) The product market for a new drug has only one seller and significant barriers to entry. The firm is earning an economic profit. Using short answers, answer the following questions. Use appropriate economic graph(s) to support your answer. Be sure to label all graphs.
a) Draw a cost & revenue graph for a firm operating in this market.
b) Explain (& illustrate) how a firm would determine output $ and quantity in this market.
c) Compared to perfect competition, is this firm/market producing at an efficient level? Why or why not?
d) Provide a possible explanation for why this market has barrier entry? Which of the three types of barriers would this be?
e) Explain how this market would change in the long-run (1-2 years)? Why is this true?
3) A well-established market has only 3 firms that have engaged in tacit collusion. Using short answers, answer the following questions. Use appropriate economic graph(s) to support your answer. Be sure to label all graphs.
a) Draw a cost & revenue graph for a firm operating in this market.
b) Explain (& illustrate) how a firm would determine output $ and quantity in this market.
c) Assume that the firm's marginal costs have changed. Explain why his market would continue to produce at the same level (quantity) of output.
d) Under what conditions would a change in marginal cost cause the firm to increase decrease it's output?
e) Theoretically, why do firms want to avoid raising or lowering prices in this market?