ECO 550 Check Your Understanding – Week 7

Week 7 – Check Your Understanding:

Chapter 13 Exercise 2, 13, and 15

2. Consider the following payoff matrix:

Player B Strategy
1 2
$1,000 -$2,000
1 $2,000 -$1,000
Player A Strategy -$1,000 $2,000
2 -$2,000 $1,000

a.      Does Player A have a dominant strategy? Explain why or why not.

b.     Does Player B have a dominant strategy? Explain why or why not.

13.  Analyze the following sequential game and advise Kodak about whether they should introduce the new product, Picture CD.

New product Introduction Rival   advertising Pricing policy Kodak Sony
High $380m $620m
Moderate $610m $590m
Low $560m $540m
High $710m $550m
Introduce picture CD Moderate $620m $610m
Kodak Low $570m $540m
Do not introduce
Increased ads $400m $720m
Maintain ads $580m $600m

15.  A math graduate student explains to her friend how to approach a group of smart attractive guys who have brought along famous actor Russell Crowe.  What should her friend do?  Ignore Russell Crowe or fixate on Russell Crowe?  Explain the equilibrium reasoning underlying your answer.

Student 1
Ignore R.C. Fixate on R.C.
No date tonight Date with R.C.
(Worse) (Best)
No date tonight Date                                 with other guys
Ignore R.C. (Worse) (Better)
Student 2 Date                                 with other guys No date ever
Fixate on R.C. (Better) (Worst)
Date with R.C. No date ever
(Best) (Worst)


Best payoff – date with R.C., Better – date with other guys, Worse – no date tonight, Worst – no date ever with any of these guys.

Chapter 14 Exercise 3(b, c, d), 5(a, b, c), and 8(a, b, c)


3.  American Export-Import Shipping Company operates a general cargo carrier service between New York and several Western European ports.  It hauls two major categories of freight: manufactured items and semi-manufactured raw material.  The demand functions for these two classes of goods are

P1 = 100 – 2Q1

P2 = 80 – Q2

where Qi = tons of freight moved.  The total cost function for American is

TC = 20 + 4(Q1 +Q2)

b.     What are the profits-maximizing levels of price and output for the two freight categories?

c.      At these levels of output, calculate the marginal revenue in each market.

d.     What are American’s total profits if it is effectively able to charge different prices in the two markets.

5.  Phillips Industries manufactures a certain product that can be sold directly to retail outlets or to the Superior Company for further processing and eventual sale as a completely different product.  The demand function for each of these markets is

Retail Outlets: P1 = 60 – 2Q1

Superior Company: P2 = 40 – Q2

Where P1 and P2 are the prices charged and Q1 and Q2 are the quantities sold in the respective markets.  Phillips’ total cost function for the manufacture of this product is

TC = 10 + 8(Q1 + Q2)

a)     Determine Phillips’ total profit function.

b)     What are the profit-maximizing price and outlet levels for the product in the two markets?

c)     At these levels of output, calculate the marginal revenue in each market.

8.  The Pear Computer Company just developed a totally revolutionary new personal computer.  It estimates that it will take competitors at least two years to produce equivalent products.  The demand function for the

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