Give aLL answers correctly

\f\f7. Microhard, Inc. (60 points, 20 minutes). Microhard Inc. must decide whether to engage Moon Inc. in a joint venture or alternatively launch a hostile takeover of the company. After this corporate structure decision is made, the managers at Moon will decide whether to STAY or LEAVE the company, and simultaneously Microhard will decide whether to provide Moon's managers with a HIGH or LOW degree of independence. The strategic situation can be described in the following gaming diagram where all payoffs are in millions of dollars. GAME 1 Moon Stay Leave High 5.8 3.9 Hostile Microhard Takeover Low 14,7 9.9 Microhard GAME 2 Moon Stay Leave Joint Venture High 10,10 6,9 Microhard Low 7,8 5,9 (7a) First, consider what happens if Microhard goes ahead with a hostile takeover so that the two companies play GAME 1. Does Moon have a dominant strategy in GAME 1? Does Microhard? What is the Nash equilibrium of GAME 1? (7b) Next, consider what happens if Microhard decides to go ahead with the joint venture so the two companies play GAME 2. Does Moon have a dominant strategy in GAME 2? Does Microhard? What is the Nash equilibrium of GAME 2? (7c) Now consider the whole strategic situation. What corporate structure should Microhard choose? (7d) Finally, suppose that Microhard can pay Moon's employees to induce them to stay, but only if it actually takes over the company. The contract makes the payoff in GAME 1 to (LOW,STAY) become (14-X,7+X) when Microhard pays X million dollars to Moon's employees. What is the minimum amount that Microhard must pay Moon's employees to induce them to stay? Assuming they do so, what is the new equilibrium of GAME 1? What corporate structure should Microhard choose now?1. Short Questions (60 points, 27 minutes). Please give brief answers to each of the following three questions. (la) [Note: This problem is not covered this year.] Your company sells a surge protector for use with Palm Pilots. Your production engineers are worried, because your product volume needs to increase by 15% for revenues to cover costs. Demand, Q, for your product is currently described by Log Q1=9.37 - .02 log P, + .8 log I, + .75 log QUI , where P is the price of the device, I is current income, and "log" indicates a natural logarithm. Income is expected to rise by 10% next period, and remain at the new level after that. You are committed to holding prices fixed for the next several periods. Will the product be profitable next period? What hope is there for profitability in the longer term? (1b) You are the CEO of a company that makes FPLDD (fast portable laser disc drives). You host a party on your yacht for the CEO's of all other companies that make FPLDDs. You give a speech where you say that you believe Christmas season demand might push prices up by 40%. You also note that demand often drops off after Christmas, but repeat your well-known commitment to trying to keep FPLDD prices stable over the long term. You propose the formation of a trade association that will collect and publish retail prices "for the benefit of consumers". Your guests applaud and then return to the bar. Summarize the requirements of successful coordination. Which of these may be present here, and what may be missing? (lc) [Note: This problem is not covered this year.] Mercedes makes a Sport Utility Vehicle which sells for $50,000 and has few competitors; Chevrolet makes the Cavalier, which is a $12,000 economy car with lots of competitors. Would you expect one of these cars to have an advertising-to-sales ratio higher than the other, and if so which? Assume the advertising elasticity is the same for the two types of cars.3. Expenditure Function. We defined the expenditure function through the expenditure minimization problem: min > part subject to 2 for some fixed utility level ( > 0. The optimal solution to the expenditure minimization problem delivered the compensated (or Hicksian) demands: h " ( p. U ) = (hi ( p. D ) . . . hi (p.U )) where p is the price vector p = (p1.....Pa) and the associated expenditure function E( p. U) = _phi (p. U). (a) State the expenditure minimization problem as a constrained opti- mization problem (using the Lagrange multiplier.) (b) Using the envelope theorem carefully show and argue that OF ( PL) = h; (p. U). (1) Pi (c) For simplicity, consider now an environment with two goods only, 1 and 2. Suppose the price of good 1 is held constant and we consider how the expenditure changes with increases in the price of good 2. i. Draw an expenditure function that is (strictly) concave in the price of good 2, holding the price p, constant. ii. In particular, pick three (arbitrary price levels) 0