Assignment:
1.Megan and Amanda are both 7 years old and operate lemonade stands.
Megan lives on the east side of Welch and Amanda resides on the west side of the north-south street. Each morning, the girls must decide whether to place their stand on Welch Avenue or Lincoln. When they set their stand-up, they don't know what the other will do and can't relocate.
If both girls put their stand on Welch, both girls receive $175 profits (big profit business for 7 year old girls - don't you think!!). If both girls put their stand on Lincoln, they each receive $75 in profits. If one girl sets their stand on Welch while the other girl operates on Lincoln, the stand on Welch earns $300 in profits while the stand on Lincoln earns $225.
a.Diagram the relevant payoff matrix.
b.Does either girl have a dominant strategy?
c.Does the game have a Nash equilibrium?
d.What is the maximin strategy of each player in the game?
1.Mitchell Electronics produces a home video that has become increasingly very popular with children. Mitchell's managers have reason to believe that Wright Televideo Company is considering entering the market with a competing product. Mitchell must decide whether to set a high price to accommodate entry or a low, entry deterring price. The payoff matrix below shows the profit outcome for each company under the alternative price and entry strategies. Mitchell's profit is entered before the comma, and Wright's is after the comma.
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Wright Televideo
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Enter
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Don't Enter
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|
Mitchell
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High Price
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60,25
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85,0
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Electronics
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Low Price
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30,-20
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60,0
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|
|
|
|
|
b.Does Mitchell have a dominant strategy? Explain.
c.Does Wright have a dominant strategy? Explain.
d.Mitchell's managers have vaguely suggested a willingness to lower price in order to deter entry. Is this threat credible in light of the payoff matrix above? Why or Why not?
e.If the threat is not credible, what changes in the payoff matrix would be necessary to make the threat credible?
f.What business strategies could Mitchell use to alter the payoff matrix so that the threat is credible?
3.The Ampex Co. manufactures plastic fixtures for residential bathrooms. Currently, it has an opportunity to invest $1,000,000 in the equipment needed to produce other plastic fixtures for kitchen use. If the company decides to sell kitchen fixtures, it has reason to believe that it can generate the following profit stream during a six-year life cycle for kitchen fixtures.
End of Year Profit
1 $ 10,000
2 100,000
3 500,000
4 600,000
5 400,000
6 200,000
At the end of six years, the company can sell the capital used to make kitchen fixtures for $50,000. If the interest rate on money available to Ampex is 11% per year, should it invest in kitchen fixtures?