Questions and Answers of Managerial Economics And Strategy

1.3 The A-2-Z construction company is offered a $12,000 contract to build a fence around a house. The company’s profit if it does not have to dig out rocks underground will be $5,000. However, if
*1.2 Anil buys a painting. He believes that the artist will be famous. and the painting will be worth$2,000 with a 10% probability, the painting will be destroyed by fire or some other disaster with
1.1 Mme. Giselle’s boutique in Cleveland, Ohio, is planning to sell Parisian frocks. If the public view them as being the latest style, the frocks will be worth$10,000. However, if the public view
5. Take account of psychological factors in analyzing decision making under uncertainty.
4. Analyze whether to invest in uncertain situations.
3. Describe actions that decision makers can take to reduce their risk.
2. Discuss how attitudes toward risk affect choice under uncertainty.
1. Show how to assess the degree of risk and likely profit from a risky undertaking.
8.3 Using the same data as in Spreadsheet Exercise 8.1, assume that City Cement is an incumbent monopoly and Mountain Cement is a potential entrant. City chooses an output level and then Mountain
8.2 The local cement market is a duopoly with City Cement and Mountain Cement producing quantities qc and qm. Cement is a homogeneous product with the inverse demand function p = 20 - Q, where Q = qc
8.1 Outreach Explorations and Summit Adventures are the only two vacation adventure companies operating in a national park. The adventure experiences they offer are very similar and they compete
7.2 What are the Nash equilibria if both Intel and AMD act simultaneously in the game in the Managerial Solution?
7.1 In the game between Intel and AMD in the Managerial Solution, suppose that each firm earns a profit of 9 if both firms advertise. Use a game tree to determine the new subgame-perfect Nash
6.5 Based on the Managerial Implication, “Taking Advantage of Limited Strategic Thinking,” can a manager ever go wrong by assuming that customers are fully rational?
6.4 A familiar adage is that it is important to “never underestimate a rival.” Do the games described in the section “Behavioral Game Theory” suggest that it is also important not to
*6.3 A new government lottery has been announced.Each person who buys a ticket submits an integer number between 0 and 100. The winner is the person whose submission is closest to two-thirds of the
6.2 A prisoners’ dilemma game is played for a fixed number of periods. The fully rational solution is for each player to defect in each period. However, in experiments with students, players often
6.1 Draw a game tree that represents the ultimatum game in which the proposer is a first mover who decides how much to offer a responder and the responder then decides to accept or reject the
5.4 List at least two major advantages and two major disadvantages of being the first firm in a new product class. (Hint: See the Mini-Case “Advantages and Disadvantages of Moving First.”)
5.3 Show a game tree where the firm that moves second has a higher profit than the one that moves first in the subgame-perfect Nash equilibrium.
*5.2 Ford invites Clarion to set up a plant at Ford’s industrial complex in Brazil, where Clarion will build navigation systems for installation in the Ford cars produced there. If Clarion builds
5.1 In the Venezuela–ExxonMobil Holdup Problem in Figure 13.5, suppose that the parties could initially agree to a binding contract that Venezuela would pay ExxonMobil x dollars if it nationalizes
4.3 Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve. (Hint:Show that learning by doing lowers
*4.2 Before entry, the incumbent earns a monopoly profit of m = +16 (million). If entry occurs, the incumbent and rival each earn the duopoly profit, d = +6.Suppose that the incumbent can induce
4.1 A monopoly manufacturing plant currently uses many workers to pack its product into boxes. It believes that by investing in installing and customizing robotic arms, it can hire fewer workers and
3.6 Walmart has a reputation for using a variety of legal means to prevent unionization of its employees by frustrating union organizers (Lichtenstein, 2008).Why would it make sense for Walmart to
*3.5 Xavier and Ying are partners in a course project.Xavier is the project leader and is the first to decide how many hours, x, to put into the project. After observing the amount of time that
*3.4 An incumbent can commit to producing a large quantity of output before the potential rival decides whether to enter. The incumbent chooses whether to commit to produce a small quantity, qi, or a
3.3 The more an incumbent firm produces in the first period, the lower its marginal cost is in the second period. If a potential rival expects the incumbent to produce a large quantity in the second
3.2 The Mini-Case, “Pay-for-Delay Agreements” states that some incumbent producers of drugs with expiring patents paid potential generic producers to delay entry into the market. Why were
3.1 A store in a shopping mall can pay the owner of the mall $70,000 to prevent a competing store from opening. Without entry, the incumbent store’s profit is i = +200,000. With entry, its duopoly
2.7 A thug wants the contents of a safe and is threatening the owner, the only person who knows the code, to open the safe. “I will kill you if you don’t open the safe, and let you live if you
2.6 In the game described in Question 2.4, a new CEO takes over at Wrangler. It is common knowledge that this CEO hates the color violet and would never produce violet jeans. You can therefore remove
*2.5 In the sequential-move game described in part b of the previous question, Levi Strauss engages in pre-play communication (cheap talk). Levi Strauss tells Wrangler that it will match Wrangler’s
2.4 Levi Strauss and Wrangler are planning new-generation jeans and must decide on the colors for their products. The possible colors are white, black, and violet. The payoff to each firm depends on
2.3 Suppose the demand function is Q = 60 - 2p.Firm A, the leader, acts before Firm B, the follower.Both firms have a constant marginal cost of 6. Draw a diagram with Firm A’s output on the
2.2 The market demand function is Q = 42 -0.5p.Each firm has a marginal cost of m = 12. Firm 1, the leader, acts before Firm 2, the follower. The fixed costs of Firm 1 and Firm 2 are 20 and 50,
2.1 Solve for the Stackelberg subgame-perfect Nash equilibrium for the following game tree. What is the joint-profit maximizing outcome? Why is that not the outcome of this game? (Hint: See Q&A 13.1.)
1.6 In the Mini-Case, “Tit-for-Tat Strategies in Trench Warfare,” why did soldiers advise new recruits not to shoot at the enemy?
1.5 Change the profit matrix in Question 1.4 so that each firm gets 4 (instead of 6) if it advertises and the other firm does not. How does that change your answers?
1.4 New Forge, a small tourist town, has two Italian restaurants, Arcaro’s and Genell’s. Normally, both restaurants prosper with no advertising. Arcaro’s could take some of Genell’s customers
1.3 In a repeated game, how does the outcome differ if firms know that the game will be (a) repeated indefinitely,(b) repeated a known, finite number of times, and (c) repeated a finite number of
*1.2 In the repeated-game airline example illustrated in Table 13.1, what happens if the players know the game will last only five periods? What happens if the game is played forever but the managers
*1.1 Two firms are planning to sell 20 or 30 units of their goods and face the following profit matrix:a. What is the Nash equilibrium if both firms make their decisions simultaneously? (Hint: See
6. Analyze how a manager may take advantage of a rival’s psychological biases in a dynamic game.
5. Discuss why moving first in a sequential game may be disadvantageous.
4. Show how an incumbent firm can gain by taking actions that give it a cost advantage over its rivals.
3. Use dynamic games to show how the action of an incumbent firm may deter entry by a rival.
2. Determine the strategies of firms and the outcome in games in which one player acts first.
1. Analyze the strategies of firms in repeated games.
7.3 Atlas Construction wants to buy some custom equipment from Vulcan Manufacturing. Atlas’maximum willingness to pay for the equipment is$320 (thousand). Vulcan is willing to sell the equipment as
7.2 Gray’s Gravel and Gravel Depot are duopoly producers of gravel in a small city. Industry output Q is the sum of Gray’s output and Gravel Depot’s output.The market demand function for
7.1 General Mills and Kellogg’s, major rivals in the breakfast cereal market, decide simultaneously on their advertising strategies. Each has five options, A through E. The following table shows
6.1 In the Managerial Solution safety game, could cheap talk lead both firms to invest in safety? Why or why not? What is the minimum fine that the government could levy on firms that do not invest
5.3 Suppose that Firm 1, Firm 2, and Firm 3 are the only three firms interested in the lot at the corner of Main Street and Lackawanna Avenue, where they can build a small hotel. The lot is being
5.2 At the end of performances of his Broadway play“Cyrano de Bergerac,” Kevin Kline, who starred as Cyrano, the cavalier poet with a huge nose, auctioned his prosthetic proboscis, which he and
5.1 Charity events often use silent auctions. A donated item, such as a date with a movie star, is put up for bid. (See www.ecorazzi.com/2008/02/22/ebay-andoxfam-help-you-win-a-date-with-colin-firth
4.4 The Mini-Case, “Nash Bargaining Over Coffee”applies the generalized Nash product, NP = (R - dR)a(M - dM)1 -a, to bargaining between retailers and manufacturers over the price of coffee.
4.3 Situations of the type described in Question 4.2 are fairly common in the drug business and sales of patent rights are common. However, sometimes negotiations over such sales take a long time and
*4.2 Oculus and Maxygen are small drug companies.Oculus has obtained a patent on a new antibiotic that is effective against an emerging superbug—a bacteria that is resistant to traditional
4.1 In the used car bargaining problem in Q&A 12.3, if Bo can get only 9 elsewhere, does the Nash bargaining solution change in Jane’s favor? Why?
3.4 Traditionally, the Harrison Resort Hotel sponsors an annual festival, making a significant investment in marketing to attract tourists to its hotel. Julie, the manager of nearby Lakeshore
3.3 For the payoffs described in Questions 3.1 and 3.2, would Blues Brothers and Wild and Crazy Guys gain by merging? (Hint: See the Managerial Implication,“Solving Coordination Problems.”)
3.2 How do your answers to Question 3.1 change if everything in the profit matrix remains the same except that Firm B loses 10 (payoff is -10) if it invests and Firm A doesn’t invest (the
*3.1 Consider the following payoff matrix for a complementary investment game. The number in the lower-left corner is the payoff to Firm A. The other number is the payoff to Firm B.a. Does either
2.12 How would the analysis in Q&A 12.2 change if the payoffs to both firms are 3 in the upper-left corner of the profit matrix (where both firms choose the Amazon standard) and the payoffs to both
2.11 Show that the mixed-strategy equilibrium for the game in Table 12.7 has both firms enter with probability 13.
2.10 Lena employs Joseph. She wants him to work hard rather than to loaf. She considers offering him a bonus or not giving him one. All else the same, Joseph prefers to loaf.If they choose actions
2.9 The Great Recession of 2007–2009 hit young people particularly hard, with long-lasting effects. In June 2010, 15.3% of 20- to 24-year-old Americans were unemployed, compared to 8.2% for older
2.8 Takashi Hashiyama, president of the Japanese electronics firm Maspro Denkoh Corporation, was torn between having Christie’s or Sotheby’s auction the company’s $20 million art collection,
2.7 Suppose that you and a friend play a “matching pennies” game in which each of you uncovers a penny. If both pennies show heads or both show tails, you keep both. If one shows heads and the
2.6 How would your answers to Question 2.5 change if Firm 2 gets 3 instead of 8 when it chooses a low price and Firm 1 chooses a high price?
2.5 Two firms face the following profit matrix:Given these profits, Firm 1 wants to match Firm 2’s price, but Firm 2 does not want to match Firm 1’s price. Does either firm have a dominant
2.4 Based on the Mini-Case, “Timing Radio Ads,” would competing radio stations benefit from applying the Pareto Principle (even if they do not use that term)in deciding on timing for radio ads?
2.3 Given the network profit matrix in Question 2.1, can the Pareto criterion help the networks settle on a single equilibrium? Explain.
*2.2 Given the network profit matrix in Question 2.1, can cheap talk (pre-play communication) help the networks settle on a single equilibrium? Why or why not?
2.1 Assume the network scheduling profit matrix is How many pure-strategy Nash equilibria does this game have? Explain.
1.9 Modify Question 1.8 so that if Firm 1 chooses High and Firm 2 chooses Low (the upper-right corner), Firm 1 receives 1 rather than 3. How does that change your answer?
1.8 Firm 1 and Firm 2 manufacture blankets. They compete in quality. Given their payoff matrix, identify each firm’s best response to its rival’s actions. What is the Nash equilibrium? (Hint: See
1.7 Based on the Mini-Case, “Strategic Advertising,”would cola advertising or cigarette advertising correspond more closely to a prisoners’ dilemma game?
*1.6 Suppose that Toyota and GM are considering entering a market for electric automobiles and that their profits (in millions of dollars) from entering or staying out of the market are If the firms
1.5 How do your answers to Question 1.4 change if Firm 1 gets 5 instead of 3 when Firm 2 charges a high price and Firm 2 charges a low price?
1.4 Two firms face the following profit matrix:Is it true that, given these profits, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price? Does either firm have
1.3 How does your answer to Question 1.2 change if Firm 1 gets 1 instead of 4 when both firms advertise?(Hint: Start by drawing the new profit matrix.)
1.2 Two firms compete by advertising. Given the profit matrix for this advertising game, identify each firm’s best response to its rival’s possible actions. Does either firm have a dominant
*1.1 Show the profit matrix and explain the reasoning in the prisoners’ dilemma example where Larry and Duncan, possible criminals, will get one year in prison if neither talks, two years in jail
5. Use game theory to bid optimally in auctions.
4. Determine the outcome of a bargaining game.
3. Describe the role of information and rationality in game theory.
2. Identify the different types of Nash equilibria.
1. Use game theory to analyze oligopoly markets.
6.3 Assume that the cola market is a Bertrand oligopoly and that Coke’s estimated demand function (based on Gasmi et al., 1992) is qc = 58 - 4pc + 2pp, where qc is the number of cases of Coke, pc
6.2 Use the data from Exercise 6.1. The best-response curve for Firm 2 is q2 = 6 - q1/2, which can be written as q1 = 12 - 2q2.a. Create a spreadsheet with columns denoted BR2, q1, Q, p, and Profit2.
6.1 The inverse market demand curve for a duopoly market is p = 14 - Q = 14 - q1 - q2, where Q is the market output, and q1 and q2 are the outputs of Firms 1 and 2, respectively. Each firm has a
5.2 Given the demand and cost conditions of Question 5.1, suppose that the legal intervention imposed by the government leaves the marginal cost unchanged but imposes a fixed cost. What is the
*5.1 An incumbent firm, Firm 1, faces a potential entrant, Firm 2, that has a lower marginal cost. The market inverse demand function is p = 120 - q1 - q2. Firm 1 has a constant marginal cost of $20,
4.4 Under monopolistic competition with identical firms, is it possible for a firm to produce at the minimum of its average cost curve?
4.3 Q&A 11.3 shows that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity. Does this result depend upon whether firms produce identical or
*4.2 What is the effect on prices and the number of firms under monopolistic competition if a government provides a subsidy that reduces the fixed cost of each firm in the industry?
4.1 In a monopolistically competitive market, the government applies a specific tax of $5 per unit of output. What happens to the profit of a typical firm in this market? Does the number of firms in

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