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Questions and Answers of Economics

Provide a real-world example of a market that approximates each oligopoly setting, and explain your reasoning.a. Cournot oligopoly.b. Stackelberg oligopoly.c. Bertrand oligopoly.
Two firms compete in a market to sell a homogeneous product with inverse demand function P = 400 – 2Q. Each firm produces at a constant marginal cost of $50 and has no fixed costs. Use this
Consider a homogeneous-product duopoly where each firm initially produces at a constant marginal cost of $100 and there are no fixed costs. Determine what would happen to each firm’s equilibrium
Determine whether each of the following scenarios best reflects features of Sweezy, Cournot, Stackelberg, or Bertrand duopoly:a. Neither manager expects her own output decision to impact the other
Suppose a single firm produces all of the output in a contestable market. The market inverse demand function is P = 100 – Q, and the firm’s cost function is C(Q) = 2Q. Determine the firm’s
Ford executives announced that the company would extend its most dramatic consumer incentive program in the company’s long history—the Ford Drive America Program. The program provides consumers
You are the manager of BlackSpot Computers, which competes directly with Condensed Computers to sell high-powered computers to businesses. From the two businesses’ perspectives, the two products
The Hull Petroleum Company and Inverted V are retail gasoline franchises that compete in a local market to sell gasoline to consumers. Hull and Inverted V are located across the street from each
You are the manager of a firm that competes against four other firms by bidding for government contracts. While you believe your product is better than the competition, the government purchasing
The market for a standard-sized cardboard container consists of two firms: CompositeBox and Fiberboard. As the manager of CompositeBox, you enjoy a patented technology that permits your company to
You are the manager of Taurus Technologies, and your sole competitor is Spyder Technologies. The two firms’ products are viewed as identical by most consumers. The relevant cost functions are C(Qi)
During the 1980s, most of the world’s supply of lysine was produced by a Japanese company named Ajinomoto. Lysine is an essential amino acid that is an important livestock feed component. At this
PC Connection and CDW are two online retailers that compete in an Internet market for digital cameras. While the products they sell are similar, the firms attempt to differentiate themselves through
In an attempt to increase tax revenues, legislators in several states have introduced legislation that would increase state excise taxes. Examine the impact of such an increase on the equilibrium
Jones is the manager of an upscale clothing store in a shopping mall that contains only two such stores. While these two competitors do not carry the same brands of clothes, they serve a similar
1. The opening statement on the Web site of the Organization of Petroleum Exporting Countries (OPEC) says, “ . . . OPEC’s eleven members are all developing countries whose economies are heavily
1. Semi-Salt Industries began its operation in 1975 and remains the only firm in the world that produces and sells commercial-grade polyglutamate. While virtually anyone with a degree in college
Use the following one-shot, normal-form game to answer the questions below. a. Find each player??s dominant strategy, if it exists.b. Find each player??s secure strategy.c. Find the Nashequilibrium.
In a two-player, one-shot simultaneous-move game each player can choose strategy A or strategy B. If both players choose strategy A, each earns a payoff of $500. If both players choose strategy B,
Use the following payoff matrix for a simultaneous-move one-shot game to answer the accompanying questions. a. What is player 1??s optimal strategy? Why?b. Determine player 1??s equilibriumpayoff.
Use the following normal-form game to answer the questions below. a. Identify the one-shot Nash equilibrium.b. Suppose the players know this game will be repeated exactly three times. Can they
Use the following normal-form game to answer the questions below. a. For what values of x is strategy D (strictly) dominant for player 2?b. For what values of x is strategy B (strictly) dominant for
Consider a two-player, sequential-move game where each player can choose to play right or left. Player 1 moves first. Player 2 observes player 1’s actual move and then decides to move right or
Use the following extensive-form game to answer the questions below.a. List the feasible strategies for player 1 and player 2.b. Identify the Nash equilibria to this game.c. Find the subgame
Use the following payoff matrix for a one-shot game to answer the accompanying questions. a. Determine the Nash equilibrium outcomes that arise if the players make decisions independently,
Use the following payoff matrix to answer the following questions. Suppose this is a one-shot game:a. Determine the dominant strategy for each player. If such strategies do not exist, explain why
While there is a degree of differentiation among general merchandise retailers like Target and Kmart, weekly newspaper circulars announcing sales provide evidence that these firms engage in price
Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $500. If both firms
Coca-Cola and PepsiCo are the leading competitors in the market for cola products. In 1960 Coca-Cola introduced Sprite, which today is the worldwide leader in the lemon-lime soft drink market and
You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. Toyota has
At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg’s was quoted as saying, “ . . . for the past several years, our individual company growth
You are a pricing manager at Argyle Inc.??a medium-sized firm that recently introduced a new product into the market. Argyle??s only competitor is Baker Company, which is significantly smaller than
You are the manager of GearNet and must decide how many Internet hubs to produce to maximize your firm??s profit. GearNet and its only rival (Net-Works) sell dual-speed Internet hubs that are
Suppose that U.S.-based Qualcomm and European-based T-Mobile are contemplating infrastructure investments in a developing mobile telephone market. Qualcomm presently uses a code-division multiple
Japanese officials are considering a new tariff on imported pork products from the United States in an attempt to reduce Japan’s reliance on U.S. pork. Due to political pressure, the U.S.
An office manager is concerned with declining productivity. Despite the fact that she regularly monitors her clerical staff four times each day—at 9:00 AM, 11:00 AM, 1:00 PM, and again at 3:00
You manage a company that competes in an industry that is comprised of five equal-sized firms. A recent industry report indicates that a tariff on foreign imports would boost industry profits by $30
Using the same payoff matrix as in question 9, suppose this game is infinitely repeated and that the interest rate is sufficiently “low.” Identify trigger strategies that permit Players 1 and 2
1. Suppose a UAWlabor contract with General Dynamics is being renegotiated. Some of the many issues on the table include job security, health benefits, and wages. If you are an executive in charge of
Based on the best available econometric estimates, the market elasticity of demand for your firm’s product is – 1.50. The marginal cost of producing the product is constant at $75, while average
Based on the following graph (which summarizes the demand, marginal revenue, and relevant costs for your product), determine your firm??s optimal price, output, and the resulting profits for each of
You are the manager of a firm that charges customers $16 per unit for the first unit purchased, and $12 per unit for each additional unit purchased in excess of one unit. The accompanying graph
You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1’s elasticity of demand is –2, while group 2’s is –6. Your marginal
You are the manager of a monopoly. A typical consumer’s inverse demand function for your firm’s product is P = 100 –20Q, and your cost function is C(Q) = 20Q.a. Determine the optimal two-part
A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer’s demand for the product is Qd = 50 –.25P, and the marginal cost of production is
You are the manager of a firm that produces products X and Y at zero cost. You know that different types of consumers value your two products differently, but you are unable to identify these
You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your “No Haggle” sales policy. Last year, your dealership earned record profits of $1.5
You are a pricing analyst for QuantCrunch Corporation, a company that recently spent $10,000 to develop a statistical software package. To date, you only have one client. A recent internal study
According to the Cahner’s In-Stat Group, the number of worldwide wireless phone subscribers will soon reach the 1 billion mark. In the United States alone, the number of wireless subscribers is
The American Baker’s Association reports that annual sales of bakery goods last year rose 15 percent, driven by a 50 percent increase in the demand for bran muffins. Most of the increase was
Blue Skies Aviation is a manufacturer of small single-engine airplanes. The company is relatively small and prides itself on being the only manufacturer of customized airplanes. The company’s high
As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that
BAA is a private company that operates some of the largest airports in the United Kingdom, including Heathrow and Gatwick. Suppose that BAA recently commissioned your consulting team to prepare a
Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market, the
An analyst for FoodMax estimates that the demand for its “Brand X” potato chips is given by ln Qdx = 10.34 – 3.2 ln PX + 4PY + 1.5 ln AX, where QX and PX are the respective quantity and price
You manage a company that competes in an industry that is comprised of five equal-sized firms that produce similar products. A recent industry report indicates that the market is fairly saturated, in
1. You are the manager of a local sporting goods store and recently purchased a shipment of 60 sets of skis and ski bindings at a total cost of $30,000 (your wholesale supplier would not let you
1. You own a franchise of rental car agencies in Florida. You recently read a report indicating that about 80 percent of all tourists visit Florida during the winter months in any given year, and
1. Many home improvement retailers like Home Depot and Lowes have lowprice guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest
Consider the two options in the following table, both of which have random outcomes: a. Determine the expected value of each option.b. Determine the variance and standard deviation of each option.c.
For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a. A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent
Your store sells an item desired by a consumer. The consumer is using an optimal search strategy; the accompanying graph shows the consumer??s expected benefits and costs of searching for a lower
You are the manager of a firm that sells a “commodity” in a market that resembles perfect competition, and your cost function is C(Q) = Q + 2Q2. Unfortunately, due to production lags, you must
You are a bidder in an independent private values auction, and you value the object at $2,500. Each bidder perceives that valuations are uniformly distributed between $1,000 and $10,000. Determine
You are one of five risk-neutral bidders participating in an independent private values auction. Each bidder perceives that all other bidders’ valuations for the item are evenly distributed between
The text points out that asymmetric information can have deleterious effects on market outcomes.a. Explain how asymmetric information about a hidden action or a hidden characteristic can lead to
Life insurance policies typically have clauses stipulating the insurance company will not pay claims arising from suicide for a specified term—typically two years from the date the policy was
The FCC has hired you as a consultant to design an auction to sell wireless spectrum rights. The FCC indicates that its goal of using auctions to sell these spectrum rights is to generate revenue.
As the manager of Smith Construction, you need to make a decision on the number of homes to build in a new residential area where you are the only builder. Unfortunately, you must build the homes
Life insurance companies require applicants to submit to a physical examination as proof of insurability prior to issuing standard life insurance policies. In contrast, credit card companies offer
Congress enacted the Health Insurance Portability and Accountability Act (HIPAA) to potentially help millions of employees gain access to group health insurance. The key provision of HIPAA requires
Since the late 1990s, more than 25 domestic steel companies have filed for bankruptcy. A combination of low prices with strong competition by foreign competitors and so-called “legacy costs” of
This past year, Used Imported Autos sold very few cars and lost over $500,000. As a consequence, its manager is contemplating two strategies to increase its sales volume. The low-cost strategy
Pelican Point Financial Group’s clientele consists of two types of investors. The first type of investor makes many transactions in a given year and has a net worth of over $1 million. These
CPT Inc. is a local manufacturer of conveyor systems. Last year, CPT sold over $2 million worth of conveyor systems that netted the company $100,000 in profits. Raw materials and labor are CPT’s
Recently, PeopleSoft announced that its second-quarter net income was down by nearly 70 percent. The company’s CEO attributes the poor performance to an ongoing hostile takeover battle against its
You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise. McDonald’s indicates that,
Online MBA programs significantly reduce the cost to existing managers of obtaining an MBA, as they permit students to maintain their existing residence and employment while working toward an
Prosecutors representing the Securities and Exchange Commission recently announced criminal charges against 13 individuals for engaging in insider trading. According to the SEC’s director of
BK Books is an online book retailer that also has 10,000 “bricks and mortar” outlets worldwide. You are a risk-neutral manager within the Corporate Finance Division and are in dire need of a new
1. A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the
A potential entrant can produce at the same cost as the monopolist illustrated in the figure on the next page. The monopolist??s demand curve is given by DM, and its average cost curve is AC.a. What
A monopolist earns $40 million annually and will maintain that level of profit indefinitely, provided that no other firm enters the market. However, if another firm enters the market, the monopolist
Consider the following simultaneous move game: a. What is the maximum amount player 1 should be willing to pay for the opportunity to move first instead of moving at the same time as player 2?
A firm is considering building a two-way network that links 10 users. The cost of building the network is $6,000.a. How many potential connection services does this network provide?b. If each user is
Two firms compete in a Cournot fashion. Firm 1 successfully engages in an activity that raises its rival’s marginal cost of production. a. Provide two examples of activities that might raise
The market for taxi services in a Midwestern town is monopolized by firm 1. Currently, any taxi services firm must purchase a $40,000 ??medallion?? from the city in order to offer its services. A
Two firms compete in a homogeneous product market where the inverse demand function is P = 10 – 2Q (quantity is measured in millions). Firm 1 has been in business for one year, while firm 2 just
In this chapter’s Headline, we learned that Barkley Enterprises benefits by announcing well in advance of the trade show that its new marketing plan will target professionals. Suppose you are an
In the following game, determine the maximum amount you would be willing to pay for the privilege of moving (a) First, (b) Second, or (c) Third: There are three players, you and two rivals. The
Between 1995 and 1997, American Airlines competed in the Dallas/Ft Worth Airport against several other low-cost carriers. In response to these low-cost carriers, American Airlines reduced its price
During the early days of the Internet, most dot-coms were driven by revenues rather than profits. A large number were even driven by “hits” to their site rather than revenues. This all changed in
A number of professional associations, such as the American Medical Association and the American Bar Association, support regulations that make it more costly for their members (for example, doctors
Barnacle Industries was awarded a patent over 15 years ago for a unique industrial strength cleaner that removes barnacles and other particles from the hulls of ships. Thanks to its monopoly
During the dot-com era, mergers among some brokerage houses resulted in the acquiring firm paying a premium on the order of $100 for each of the acquired firm’s customers. Is there a business
Argyle is a large, vertically integrated firm that manufactures sweaters from a rare type of wool produced on its sheep farms. Argyle has adopted a strategy of selling wool to companies that compete
You are the manager of 3D Designs—a large imaging company that does graphics and Web design work for companies. You and your only competitor are contemplating the purchase of a new 3-D imaging
By the end of 1995, Netscape’s share of the browser market grew to 90 percent by continually upgrading its product to include new features such as e-mail and video capabilities. Shortly thereafter,
The CEO of a regional airline recently learned that its only competitor is suffering from a significant cash-flow constraint. The CEO realizes that its competitor’s days are numbered, but has asked
Evaluate the following: “Since a rival’s profit-maximizing price and output depend on its marginal cost and not its fixed costs, a firm cannot profitably lessen competition by implementing a

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