Assignment:
1. Mayo Destination Water Park Center offers family fun year-round in the Northstar state to locals and out-of-state visitors to the nearby Mayo Center. The demand for day-passes to the water park for each market segment is independent of the other market segment. The marginal cost of providing service to each visitor is $5 per day. Suppose the daily demand curves for the two market segments are:
Locals:
Out of town:
a.If Mayo Destination Water Park Center charges one price to locals, what is the profit maximizing price for locals? How many day-passes will be sold per day to locals?
b.If Mayo Destination Water Park Center charges one price to out-of-towners, what is the profit maximizing price for out-of-town guests? How many day-passes will be sold per day to out-of-town guests?
c. (Explain why the relationship between the prices charged to locals versus the prices charged to out of town visitors? Why does this happen?
2. Which of the following examples is an adverse-selection problem and which is a moral hazard incentive problem? Explain why. In each case, give one method that the firm might use to reduce the problem.
a.A Grand Forks restaurant wants to buy a used car for deliveries, but is afraid of buying a lemon.
b.A bar decides to offer an all-you-can-drink promotion that is sold for a fixed price. The bar discovers that the customers for this promotion are not its usual clientele. Instead, the customers tend be politicians who consume an amazing amount of liquor. The bar loses money on the promotion.
c.A car wash owner hires a manager who promises to work long hours. When the owner is out of town, the manager goes home early. This action results in lost profits for the firm.
d.The CEO of Best Buy takes actions that reduce the value of Best Buy stock but increase his utility.
e.Jenna buys a used Playstation3 from a classmate. She soon discovers it doesn't play movie or game disks and stops playing games after 15 to 20 minutes.
3. The following game matrix shows the strategies and payoffs to Sony and Philips as they choose what connection technology to offer on their televisions.
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Philip's Strategy
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Offer HDMI
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Offer S-video
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Sony's Strategy
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Offer HDMI
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Sony gets $22
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Sony gets $22
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Philips gets $33
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Philips gets $13
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Offer S-video
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Sony gets $10
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Sony gets $30
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Philips gets $17
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Philips gets $20
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a.What is game theory? What is a Nash Equilibrium?
b. What is the dominant strategy, if any, for Sony? Why?
c.What is the dominant strategy, if any, for Philips? Why?
d.What is the Nash equilibrium or Nash equilibriums in this game? Why? Be sure to explain your reasoning to receive full credit.
4Sun Resorts
Sun Resorts has a hotel on a Caribbean Island. It recently spent money to lobby the government to build a better airport and expand air service. Why did they do this? Do you think that Sun Resorts cares about how many airlines will serve the island? Explain.
5. The following game matrix shows the strategies and payoffs for Billy Corrigan and Eddie Vedder as they consider their concert schedule for Memorial Day. Each performer is headlining a national summer tour. The payoffs are in thousands of dollars.
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Eddie Vedder's Strategy
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Concert at Target Center
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Concert in Chicago
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Billy Corrigan's Strategy
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Concert at Xcel Center
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Billy gets $10
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Billy gets $22
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Eddie gets $19
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Eddie gets $18
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Concert in Chicago
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Billy gets $28
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Billy gets $10
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Eddie gets $34
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Eddie gets $20
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a. What is the dominant strategy, if any, for Billy Corrigan?
b.What is the dominant strategy, if any, for Eddie Vedder?
c.If there is a Nash equilibrium in the game, describe the Nash equilibrium or Nash equilibria.