Assignment:
Question 1
Consider a situation where 2 firms compete solely by price. The following payoff table shows the profits (in thousands of dollars) of each firm either choosing a high price or a low price:
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Firm B
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Low Price
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High Price
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Firm A
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Low Price
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$400, $1000
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$1,200, $1,200
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High Price
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$0, $3,000
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$800, $2000
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1. What is the optimal strategy for Firm A? Is it a dominant strategy? Explain why or why not.
2. What is the optimal strategy for Firm B? Is it a dominant strategy? Explain why or why not?
3. What is the likely outcome of this game? Which payoff will each firm receive?
Question 2
Please answer both questions
1. Ore-Ida is the one of the largest potato processors in the world. Explain why Ore-Ida buys it potatoes from farmers instead of growing potatoes itself?
2. Why would Ikea, a wood furniture and home furnishings manufacturer, buy forests and woodlands?
Question 3
You own 2 restaurants serving the exact same type of food. The menus of meals and drinks served are exactly the same.
Suppose that the costs of each restaurant are exactly the same.
Suppose further that the number of potential customers for each restaurant is exactly the same.
One restaurant is located in a wealthier section of town; one restaurant is located in a poorer section of town.
1. Should each restaurant have the same prices on their menus or different prices at each location? If different prices, which restaurant should have the higher prices and which restaurant should have the lower prices? Why?
2. How does your pricing policy above benefit you? Explain why.
Question 4
John is an accountant and just earned your CPA. John has decided to open up John's Tax Service on Main Street. He leases a storefront: his office in the storefront has glass all around it. John has hired an administrative assistant who sits outside his office, As part of his/her administative duties, the administrative assistant meets clients as they walk in the door and escorts the clients into John's office. Assuming that John spends most of his time inside the office, should John pay his administrative assistant an hourly wage, piece rates or a % or profits? Explain why.
Question 5
XYZ Cable Co. is trying to decide whether to bundle 2 channels: its "Sports" channel and its "History" channel. It has identified 2 type of customers who regularly subscribe to these channels, "Sports Nuts" and "History Buffs".
Below is the willingness to pay of Sports Nuts and History Buffs for each of the channels.
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Willingness to Pay
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Number of Customers
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Sports Channel
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History Channel
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Sports Nuts
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10,000
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$20
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$4
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History Buffs
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2,000
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$3
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$10
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Assuming that the incremental cost of serving 1 more customer for both channels is zero:
1. If you decide to have a separate price for each channel (2 prices), what is the optimal price and what are your profits? What is the consumer surplus? Show your calculations.
2. If you decide to bundle the 2 channels, what is the optimal price and what are your profits? What is the consumer surplus? Show your calculations.
Question 6
Two firms choose the prices of their products on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make
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Firm B
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Low Price
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High Price
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Firm A
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Low Price
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$400, $600
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$100, $700
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High Price
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$600, $300
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$150, $400
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1. Is the Pricing decision facing the Firm A and Firm B a prisoner's dilemma situation? Why or why not?
2. What is the outcome of the game if the firms do not cooperate? Why?
3. What is the outcome of the game if the firms do cooperate? Why?