1. Consider the video game console market circa 2009. Sony sells its PS3 console for $399. Microsoft sellsitsXBox360atthesamepricepoint,$399.Thereisspeculationamongvideo gaming analysts that eitherSony orMicrosoft or both will cut their priceanother $100 in the comingquarter.(Nintendo's Wiiis pricedat$249. Nintendohasnotchangedthepriceofthe Wiiforseveralyears).AWallStreetanalysthasestimatedtheexpectedsalesforthePS3and Xbox 360 in the next quarter under different price scenarios. The estimates are in Table 2.1 below. Using the firms' annual reports and other information, the analyst has also estimated the consoles' unit costs at different production volumes, shown in Table 2.2.

1. ArethePS3andXbox360complementsorsubstitutes?Howcanyoutell basedon the data in the tables? (1pt)

1. Whatisthemid-pointown-priceelasticity(aka,arcelasticity)forthePS3between

$299and$399?(1pt)

1. WillSonyincreaseordecreaseitsrevenueifitdropsthePS3priceto$299?(1pt)

1. Doeseitherfirmenjoyeconomiesofscale?(1pt)

1. DepictthepricingchoicesfacingSonyandMicrosoftasasimultaneousgame, including the expected payoffs. (Ignore Nintendo) (3pts)

1. IsthereaNashequilibriuminthisgame?(1pt) Table 2.1

Table2.2

PS3 quantity produced (mill)	PS3average unit cost	Xbox360quantity produced (mill)	Xbox360average unit cost
8.25	$306	7.0	$308
8.75	$281	8.0	$279
10.25	$212	11.5	$232
10.75	$198	12.5	$219

PS3price	Xbox360 price	PS3 estimated unitssold(mill)	Xbox360estimated units sold (mill)
$299	$299	10.25	11.5
$299	$399	10.75	7.0
$399	$299	8.25	12.5
$399	$399	8.75	8.0