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4.2. Game theory (Prisoner's dilemma). Often, many sectors in an economy have two main rivals, battling it out in the marketplace. There can be rivalry such as between Apple and Samsung in Phones and Laptops. Suppose Apple plans to cut its price. Samsung will likely follow suit to retain its market share. This may end up with low profits for both companies. A price drop by either company may thus be construed as defecting since it breaks an implicit agreement to keep prices high and maximize profits. Thus, if Apple drops its price but Samsung continues to keep prices high. Apple is defecting. while Samsung is cooperating (by sticking to the spirit of the implicit agreement). In this scenario, Apple may win market share and earn incremental profits by selling more. Assume that the incremental profits that accrue to Apple and Samsung are as follows: o If both keep prices high (Cooperate), profits for each company increase by AED200 million (because of normal growth in demand). o If one drops prices (defects) but the other does not (cooperates), profits increase by AED450 million for the former because of greater market share and are unchanged for the latter. o If both companies reduce prices (defect), the increase in tele services offsets the lower price, and profits for each company increase by AED50 million. The profit matrix for Apple vs. Samsung (in millions) Samsung High price Low price Cooprate High price Apple Low price Note: Profit for Apple is shaded in blue, while the unishaded men is for Samsung Question: In the above strategic game, find the Nash equilibrium. Clearly explain your answer. (2 points) Bonus (5 Points)The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on resumes, but some doubt about fit always lingers when a decision to hire or not is to be made. What are the Type I and II decision error costs? Which decision error is more likely to be discovered by the CEO? How does this affect the HR manager's hiring decisions?The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on resumes, but some doubt about fit always lingers when a decision to hire or not is to be made. What are the Type I and II decision error costs? Which decision error is more likely to be discovered by the CEO? How does this affect the HR manager's hiring decisions?In which of the following circumstances would the Canadian economy achieve allocation efficiency? Marginal product is equal for all factors of production. Marginal cost is equalized across industries, Price equals average cost in all industries. There are no idle resources in the economy. Marginal cost equals price in all industries.MC H Price PI P1 Output MR. FIGURE 10-7 The diagram above shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the phormocevocal firm holes a 20-year potent on its production and soles. This protection gives the firm monopoly power for the 20 years of the potent. The diagram above shows that Rexmaster Pharmaceuticals charges a single price for it's drug and is maximizing its profits. If it then begins to perfectly price discriminate among its buyers and maximizes its profits by doing so, it will no longer be equating MR and MC. decrease its total output. O'generate an Increase in producer surplus equal to areas D + E + H . I, cause a loss of economic surplus to society as a whole, reduce its producer surplus by areas C . F + H.MC H Price PI P1 Output MR. FIGURE 10-7 The diagram above shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the phormocevocal firm holes a 20-year potent on its production and soles. This protection gives the firm monopoly power for the 20 years of the potent. The diagram above shows that Rexmaster Pharmaceuticals charges a single price for it's drug and is maximizing its profits. If it then begins to perfectly price discriminate among its buyers and maximizes its profits by doing so, it will no longer be equating MR and MC. decrease its total output. O'generate an Increase in producer surplus equal to areas D + E + H . I, cause a loss of economic surplus to society as a whole, reduce its producer surplus by areas C . F + H.2. [16 marks] Joe owns a plot of good agricultural land, which is a fixed input in the production of wheat. Joe's fixed costs are zero. He cannot farm the land himself, but instead hires workers (L) to do so. The production schedule for bushels of wheat on the land is given by: Workers, L Total Product (bushels of wheat) 0 0 1 40 2 100 3 180 4 240 un 280 6 312 7 336 8 350 (a) [6 marks] Copy the table into your assignment and add the following columns: AP and MP. (Note, for MP you need to go 'between' each of the L-levels.) After hiring how many workers does a diminishing marginal product of labour set in? (b) [4 marks] Draw two separate diagrams: one for TP, and one for AP and MP. (c) [6 marks] Suppose Joe can sell wheat for $100/bushel. If workers cost $3,000 each, how many workers should he hire, and what profit would Joe make? How would your answer change if workers cost $4,000 each?2. [16 marks] Joe owns a plot of good agricultural land, which is a fixed input in the production of wheat. Joe's fixed costs are zero. He cannot farm the land himself, but instead hires workers (L) to do so. The production schedule for bushels of wheat on the land is given by: Workers, L Total Product (bushels of wheat) 0 0 1 40 2 100 3 180 4 240 un 280 6 312 7 336 8 350 (a) [6 marks] Copy the table into your assignment and add the following columns: AP and MP. (Note, for MP you need to go 'between' each of the L-levels.) After hiring how many workers does a diminishing marginal product of labour set in? (b) [4 marks] Draw two separate diagrams: one for TP, and one for AP and MP. (c) [6 marks] Suppose Joe can sell wheat for $100/bushel. If workers cost $3,000 each, how many workers should he hire, and what profit would Joe make? How would your answer change if workers cost $4,000 each
