Currently stuck with this assignment.

#1

1. Characteristics of monopolistic competition Consider the monopolistically competitive market structure, which has some features of a perfectly competitive market and some features of a monopoly. Complete the following table by indicating whether each attribute characterizes a perfectly competitive market, a monopolistically competitive market, both, or neither. Check all that apply. Attributes Perfectly Competitive Market Monopolistically Competitive Market Horizontal (flat) demand curve O Freedom of entry and exit O Product differentiation O Few sellers O10. Collusive outcome versus Nash equilibrium Consider a remote town in which two restaurants, All-You-Can-Eat Cafe and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. If neither restaurant cleans, each will earn $13,000: alternatively, if they both hire workers to clean, each will earn only $10,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $18,000, and the other restaurant will make only $6,000. Complete the foiiowing payoff matrix using the previous information. (Note: AilVouCanEat Cafe and Good-Grub Diner are both protmaximizing firms. } GoodGrub Diner Dad $131100 $10000 $10000 Cleans Up 5 All-You-Can-Eat Cafe Doesn't Clean Up Points: Of 1 Explanation: Close Explanation A In each cell of a payoff matrix, the rst entry always corresponds to the payoff of ne player on the left, and the second entry always corresponds to the payoff of Hie player on top. To ll in the upper left cell, you need to determine the prot for each restaurant when GoodGrub Diner cleans up and AllYouCanEat Cafe also cleans up. According to the given infonnation, each restaurant makes $10,000, so $10,000, $10,000 appears in the rst column and rst row. You can use similar analysis to ll in the remaining cells. If AllYouCanEat Cafe and GoodGrub Diner decide to collude, the outcome of this game is as follows: AllYouCanEat Cafe does not clean HI\" and GoodGrub Diner does not clean J. Points: 0;\" 1 Explanation: Close Explanation A If the two restaurants collude, they will each maximize prot by choosing not to clean. Each will earn $13,000. If both restaurants decide to cheat and behave noncooperatiyely, the outcome reflecting the unique Nash equilibrium of this game is as follows: All- 'r'ou-Can-Eat Caf-u'" , and GoodGrub Diner cleans v\" . Points: Of 1 Points: 0;' 1 Explanation: Close Explanation A A Nash equilibrium is a set of strategies {one for each player} in which each player's strategy.r is the best option for that player, given the chosen strategy of the player's opponents. If AllYouCanEat Cafe cleans and GoodGrub Diner does not, AllYouCanEat Cafe earns $18,000 and GoodGrub Diner earns $6,000. This is not a Nash equilibrium because GoodGrub Diner has the incentive to clean and earn $10,000 instead of $6,000. Similarly, if GoodGrub Diner cleans and All-You-Can-Eat Cafe does not, All-You-Can-Eat Cafe will have the incentive to clean and earn more. Therefore, this is not a Nash equilibrium either. If both restaurants choose not to clean, each earns $13,000. However, either restaurant has the incentive to clean and make $18,000 instead, so both restaurants not cleaning cannot be a Nash equilibrium. If both restaurants clean, neither restaurant will have an incentive to unilaterally deviate. Therefore, both restaurants cleaning is the unique Nash equilibrium of this game. 10. Collusive outcome versus Nash equilibrium Consider a remote town in which two restaurants, All-You-Can-Eat Cafe and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. If neither restaurant cleans, each will earn $13,000; alternatively, if they both hire workers to clean, each will earn only $8,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $17,000, and the other restaurant will make only $3,000. Complete the following payoff matrix using the previous information. (Note: All-You-Can-Eat Cafe and GoodGrub Diner are both profit-maximizing firms.) GoodGrub Diner Cleans Up Doesn't Clean Up Cleans Up $ $ All-You-Can-Eat Cafe Doesn't Clean Up $ $ $ $ If All-You-Can-Eat Cafe and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Cafe and GoodGrub Diner If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All- You-Can-Eat Cafe , and GoodGrub Diner9. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Blu-ray players, Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players. ch Pricing High Low High 11, 11 2, 18 Movietonia Pricing Low 18, 2 10, 10 For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $18 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms. If Movietonia prices high, Videotech will make more profit if it chooses a _ price, and if Movietonia prices low, Videotech will make more profit if it chooses a * price. If Videotech prices high, Movietonia will make more profit if it chooses a _ price, and if Videotech prices low, Movietonia will make more profit if it chooses a price. Considering all of the information given, pricing low a dominant strategy for both Movietonia and Videotech. If the firms do not collude, which strategy will they end up choosing? Both Movietonia and Videotech will choose a low price. Both Movietonia and Videotech will choose a high price. O Movietonia will choose a high price and Videotech will choose a low price. Movietonia will choose a low price and Videotech will choose a high price. True or False: The game between Movietonia and Videotech is not an example of the prisoners' dilemma. O True O False2. Entry or exit in the long run Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss. (?) 500 450 Monopolistically Competitive Outcome 400 350 300 Profit or Loss PRICE (Dollars per bike) 250 200 150 ATC 100 50 MC MR Demand 100 150 200 250 300 350 400 450 500 QUANTITY (Bikes) Given the profit-maximizing choice of output and price, the shop is earning profit, which means there are shops in the industry than in long-run equilibrium. Now consider the long run in which bike manufacturers are free to enter and exit the market.Show the possible effect of free entry and exit by shifting the demand curve for a typical individual producer of bikes on the following graph. O Demand PRICE (Dollars per bike) Demand QUANTITY (Bikes) Which of the following statements are true about both monopolistic competition and monopoly? Check all that apply. Price equals average total cost in the long run. O Price is above marginal cost. _ Firms earn zero profit in the long run. Firms are not price takers.3. Monopolistic competition and perfect competition compared Suppose that a firm produces wooden train engines in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost. 100 20 Mon Comp Outcome 80 70 Min Unit Cost PRICE (Dollars per engine) ATC 30 20 MC 10 MR Demand 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of engines) Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that at the optimal quantity. Furthermore, a monopolistically competitive firm's average total cost in long-run equilibrium is the minimum average total cost.4. Varieties of oligopoly An oligopolistic market structure is distinguished by several characteristics, one of which is either homogeneous or differentiated products. What are some other characteristics of this market structure? Check all that apply. Difficult entry Market control by many small firms Neither mutual interdependence nor mutual dependence Mutual interdependence Market control by a few large firms5. Oligopoly terminology Suppose three companies, Optimax, Megachug, and Thirstoid, dominate the sports drink market. Optimax enjoys the largest market share. Megachug, dissatisfied with its market share, begins offering its sports drink in a new container that, according to Megachug, keeps the beverage colder for a longer period of time. This is an example of: Non-price competition O Price leadership O A price war6. Breakdown of a cartel agreement Consider a town in which only two residents, Jacques and Kyoko, own wells that produce water safe for drinking. Jacques and Kyoko can pump and sell as much water as they want at no cost. For them, total revenue equals prot. The following table shows the town's demand schedule for water. Price Quantity Demanded Total Revenue (Doil'ars per gallon) (Gaiions of water) (Doiiars) 6.00 0 D 5.50 45 248 5.00 90 450 4. 50 135 608 4.00 180 3'20 3.50 225 288 3 .00 220 810 2.50 315 288 2.00 360 220 1.50 405 608 1.00 450 450 0.50 495 24B 0 540 [J Suppose Jacques and Kyoko form a cartel and behave as a monopolist. The profitmaximizing price is per gallon, and the total output is\\:|gallons. As part of their cartel agreement, Jacques and Kyoko agree to split production equally. Therefore, Jacques's profit is . .m. M... prot ... Suppose that Jacques and Kyoko have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Jacques says to himself, "Kyolco and I aren't the best offriends anyway. IfI increase my production to 45 gallons more than the cartel amount, I can increase my prot even though her prot goes down. I will do that starting tomorrow." After Jacques implements his new plan, the price of water V to per gallon. Given Kyolco and Jacques's production levels, Jacques's prot becomes and Kyoko's prot becomes . Because Jacques has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Kyoko decides that she will also increase her production to 45 gallons more than the cartel amount. After Kyolco increases her production, Jacques's profit becomes , Kyoko's prot becomes , and total prot [the sum of the prots of Jacques and Kyolco] is no_. Note that Jacques and Kyoko started by behaving cooperatively. However, once Jacques decided to cheat, Kyoko decided to cheat as well. In other words, Kyoko's output decisions are based on Jacques's actions. This behavior is an example of v . 7. Game theory terminology Select the term that best describes each definition listed in the following table. Prisoners' Nash Dominant Tit-for-tat Payoff Dilemma Definition Equilibrium Strategy Collusion Strategy Matrix Game A player's best choice, if it exists, regardless of his or her opponent's strategy O O O O O O A visual representation of a game showing all possible strategies for each player and all O O O O O O potential outcomes and payoffs The event that occurs when agents in a game form an agreement about which strategies to O O O O O O implement A strategy in which a player cooperates until the other player defects and then defects until the O O O O O O other player cooperates again8. Solving for dominant strategies and the Nash equilibrium Suppose Van and Amy are playing a game in which both must simultaneously choose the action Left or Right. The payoff matrix that follows shows the payoff each person will earn as a function of both of their choices. For example, the lower-right cell shows that if Van chooses Right and Amy chooses Right, Van will receive a payoff of T" and Amy will receive a payoff of 4. Amy Left Right Left E5, 3 E, 4 Van Right 3, 3 ?, 4 The only dominant strategy in this game is for V to choose v The outcome reecting the unique Nash equilibrium in this game is as follows: Van chooses v and Amy chooses v