Problem 1) Two consumers Justin and Cindy of the same product have the following demand curves: Q1 = 500 – 10 P and Q2 = 500 – 20 P. The marginal cost (MC) for the firm is $10. Calculate the prices when the firm discriminates between the two consumers. Is this a good strategy, or should the firm charge the same price to both of them?
Problem 2) The route from New York City to Albany is served by only two airlines, American and Delta. The payoffs from discounting or maintaining high prices are as below.
DELTA'S MAINTAIN DELTA’S DISCOUNT
AMERICAN'S $26,000 $32,000
MAINTAIN $24,000 $18,000
AMERICAN’S $21,000 $16,000
DISCOUNT $28,000 $12,000
Is there a dominant strategy? (5 points) What is (are) the Nash equilibrium (equilibria)? Explain. (5 points) Is there a mixed equilibrium strategy? (5 points) What behavior would you predict for Delta in a one-play game and why? (5 points)
Problem 3) Assume D represents the level of decentralization of corporate decision-making. The benefits of decentralization, denoted B, = 3D and the costs of decentralization, denoted, C = 2D + 2D2. What is the optimal level of decentralization (D)? Explain