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Managerial Economics and Strategy 1st edition Jeffrey M. Perloff, James A. Brander - Solutions

A small tourist town has two Italian restaurants, Romano€™s and Giardino€™s. Normally both restaurants prosper with no advertising. Romano€™s could take some of Giardino€™s customers by running radio ads and Giardino€™s could do the same thing. The
Solve for the Stackelberg subgame-perfect Nash equilibrium for the following game tree. What is the joint-profit maximizing outcome? Why is that not the outcome of this game?
The market demand function is Q = 1,000 – 1,000p. Each firm has a marginal cost of m = 0.28 (28¢ per unit). Firm 1, the leader, acts before Firm 2, the follower. Solve for the Stackelberg equilibrium quantities, prices, and profits. Compare your solution to the Nash-Cournot equilibrium.
Suppose the demand function is Q = 200 – 2p. Firm A, the leader, acts before Firm B the follower. Both firms have a constant marginal cost of 10. Draw a diagram with Firm A’s output on the horizontal axis. Show the best- response function of Firm B. On the diagram, identify the Nash-Cournot
Levi Strauss and Wrangler are planning new-generation jeans and must decide on the colors for their products. The possible colors are white, black, and violet. The payoff to each firm depends on the color it chooses and the color chosen by its rival, as the profit matrix shows:a. Given that the
In the sequential- move game described in part b of the previous question, Levi Strauss engages in pre- play communication ( cheap talk). Levi Strauss tells Wrangler that it will match Wrangler’s color choice if Wrangler chooses black and violet, but that if Wrangler opts for white, Levi Strauss
A thug wants the contents of a safe and is threatening the owner, the only person who knows the code, to open the safe. â€œI will kill you if you donâ€™t open the safe, and let you live if you do.â€ Should the owner believe the threat and open the safe? The table shows the value that
A gas station at a rest stop along the highway can pay the owner of the rest stop $ 40,000 to prevent a second station from opening. Without entry, the incumbent gas station’s profit is πi = $ 100,000. With entry, its duopoly profit would be $ 45,000 and the entrant would earn a profit of $
The more an incumbent firm produces in the first period, the lower its marginal cost in the second period. If a potential rival expects the incumbent to produce a large quantity in the second period, it does not enter. Draw a game tree to illustrate why an incumbent would produce more in the first
An incumbent can commit to producing a large quantity of output before the potential rival decides whether to enter. The incumbent chooses whether to commit to produce a small quantity, qi, or a large quantity. The rival then decides whether to enter. If the incumbent commits to the small output
Xavier and Ying are partners in a course project. Xavier is the project leader and is the first to decide how many hours, x, to put into the project. After observing the amount of time that Xavier contributes, Ying decides how many hours, y, to devote. The mark obtained by the project is 10(x + y)
Walmart has a reputation for using a variety of legal means to prevent unionization of its stores by frustrating union organizers (Lichtenstein, 2008). Why would it make sense for Walmart to spend more trying to deter unionization at a given store than it would save by preventing unionization at
A monopoly manufacturing plant currently uses many workers to pack its product into boxes. It can replace these workers with an expensive set of robotic arms. Although the robotic arms raise the monopoly’s fixed cost substantially, they lower its marginal cost because it no longer has to hire as
Before entry, the incumbent earns a monopoly profit of πm = $ 10 (million). If entry occurs, the incumbent and rival each earn the duopoly profit, πd = $ 3. Suppose that the incumbent can induce the government to require all firms to install pollution- control devices that cost each firm $ 4.
Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve.
In Q& A 13.3, suppose that A = 12 but that profits under the current wage and high output are 14 for Firm 1 and 11 for Firm 2. Which wage would Firm 1 choose?
In the Venezuela–ExxonMobil Holdup Problem in Figure, suppose that the parties could initially agree to a binding contract that Venezuela would pay ExxonMobil x dollars if it nationalizes the oil fields. How large does x have to be for ExxonMobil to invest in Venezuela?
Ford invites Clarion to set up a plant at Ford’s industrial complex in Brazil, where Clarion will build navigation systems for installation in the Ford cars produced there. If Clarion builds the plant, it would have no buyers for the plant’s output except Ford. If Clarion does not build the
Show a game tree where the firm that moves second has a higher profit than one who moves first in the subgame-perfect Nash equilibrium.
Draw a game tree that represents the ultimatum game in which the proposer is a first mover who decides how much to offer a responder and the responder then decides to accept or reject the offer. The total amount available is $ 50 if agreement is reached, but both players get nothing if the
A prisoners’ dilemma game is played for a fixed number of periods. The fully rational solution is for each player to defect in each period. However, in experiments with students, players often cooper-ate for a significant number of periods if the total number of repetitions is fairly large (such
A new government lottery has been announced. Each person who buys a ticket submits an integer number between 0 and 100. The winner is the person whose submission is closest to 2 / 3 of the average of all submissions. If ties occur, the prize will be shared. If Chloe expects other players to select
In the game between Intel and AMD in the Managerial Solution, suppose that each firm earns a profit of 9 if both firms advertise. Use a game tree to determine the new subgame-perfect Nash equilibrium outcome.
What are the Nash equilibria if both Intel and AMD act simultaneously in the game in the Managerial Solution?
Mme. Giselle’s boutique in Cleveland, Ohio, is planning to sell a Parisian frock. If the public view it as being the latest style, the frocks will be worth $ 10,000. However, if they are viewed as passé, they will be worth only $ 2,000. If the probability that they are stylish is 20%, what is
The EZ Construction Company is offered a $ 20,000 contract to build a new deck for a house. The company’s profit if it does not have to sink piers (vertical supports) down to bedrock will be $ 4,000. However, if it does have to sink the piers, it will lose $ 1,000. The probability it will have to
By next year, a stock you own has a 25% chance of being worth $ 400 and a 75% probability of being worth $ 200. What are the expected value and the variance? 1.5.
What is the difference—if any—between an individual gambling at a casino and gambling by buying a stock? What is the difference for society?
To discourage people from breaking laws against speeding, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the fine for speeding. Explain why either method can be used to discourage speeding. Which approach is a
Ryan offers to bet Kristin that if a six- sided die comes up with one or two dots showing, he will pay her $ 3, but if it comes up with any other number of dots, she’ll owe him $ 2. Is that a fair bet for Kristin?
Would risk-neutral people ever buy insurance that was not fair (that was biased against them)? Explain.
Suppose that an individual is risk averse and has to choose between $ 100 with certainty and a risky option with two equally likely outcomes: $ 100 – x and $ 100 + x. Use a graph (or math) to show that this person’s risk premium is smaller, the smaller x is (the less variable the gamble is).
Maoyong’s utility function with respect to wealth is U(W) = ln W (where “ ln W” means the natural logarithm of W). Plot his utility function and use your figure to determine whether Maoyong is risk averse.
Suppose that Laura has a utility function of U(W) = W0.5 and an initial wealth of W = $ 100. How much of a risk premium would she want to participate in a gamble that has a 50% probability of raising her wealth to $ 120 and a 50% probability of lowering her wealth to $ 80?
Hugo has a concave utility function of U(W) = W0.5. His only asset is shares in an Internet start-up company. Tomorrow he will learn the stock’s value. He believes that it is worth $ 144 with probability 2/3 and $ 225 with probability 1/3. What is his expected utility? What risk premium would he
Joanna is considering three possible jobs. The following table shows the possible incomes she might get in each job.For each job, calculate the expected value, the variance, and the standard deviation. If Joanna is averse to risk (as measured by variance), what can you predict about her job choice?
Catalina just inherited a vineyard from a distant relative. In good years (when there is no rain or frost during harvest season), she earns $ 100,000 from the sale of grapes from the vineyard. If the weather is poor, she loses $ 20,000. Catalilna’s estimate of the probability of good weather is
Malee, who is risk averse, has two pieces of jewelry, each worth $ 1,000. She plans to send them to her sister’s firm in Thailand to be sold there. She is concerned about the safety of shipping them. She believes that the probability that any box shipped will not reach its destination is θ. Is
Lucy, the manager of the medical test firm, Dubrow Labs, worries about being sued for botched results from blood tests. If it isn’t sued, the firm expects to earn a profit of 100, but if it is successfully sued, its profit will be only 10. Lucy believes the probability of a successful suit is 5%.
Consider a household that possesses $ 160,000 worth of valuables such as jewelry. This household faces a 0.2 probability of burglary, in which case it loses $ 70,000 worth of the valuables. Suppose it can buy an insurance policy for $ 15,000 that would fully reimburse the amount of loss from
An insurance agent (interviewed in Jonathan Clements, “Dare to Live Dangerously: Passing on Some Insurance Can Pay Off,” Wall Street Journal, July 23, 2005, D1) states, “On paper, it never makes sense to have a policy with low deductibles or carry collision on an old car.” But the agent
After Hurricane Katrina in 2005, the government offered subsidies to people whose houses were destroyed. How does the expectation that subsidies will be offered again for future major disasters affect the probability that risk-averse people will buy insurance and the amount they buy?
Andy and Kim live together. Andy may invest $ 10,000 (possibly by taking on an extra job to earn the additional money) in Kim’s MBA education this year. This investment will raise the current value of Kim’s earnings by $ 24,000. If they stay together, they will share the benefit from the
Use a decision tree to illustrate how a risk- neutral plaintiff in a lawsuit decides whether to settle a claim or go to trial. The defendants offer $ 50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 60%. If the plaintiff
DVD retailers choose how many copies of a movie to purchase from a studio and to stock. The retailers have the right to return all unsold copies to the studio for a full refund, but the retailer pays the shipping costs for returned copies. A small mom-and-pop retailer will sell 1, 2, 3, or 4 copies
Use a decision tree to illustrate how a risk-averse kidney patient would make a decision about whether to have a transplant operation. The patient currently uses a dialysis machine, which lowers her utility. If the operation is successful, her utility will return to its level before the onset of
Robert Green repeatedly and painstakingly applied herbicides to kill weeds that would harm his sugar beet crops in 2007. However, in 2008, he planted beets genetically engineered to withstand Monsanto’s Roundup herbicide. Roundup destroys weeds but leaves the crop unharmed, thereby saving a
In Q& A 14.4, advertising increases the probability of high demand to 80%. If all the other information in the Q& A stays the same, what is the minimum probability of high demand resulting from advertising such that Gautam decides to invest and advertise?
First answer the following two questions about your preferences: a. You are given $ 5,000 and offered a choice between receiving an extra $ 2,500 with certainty or flipping a coin and getting $ 5,000 more if heads or $ 0 if tails. Which option do you prefer? b. You are given $ 10,000 if you will
Evan is risk seeking with respect to gains and risk averse with respect to losses. Louisa is risk seeking with respect to losses and risk averse with respect to gains. Illustrate both utility functions. Which person’s attitudes toward risk are consistent with prospect theory? Which of these
Joe lost a substantial amount gambling at a racetrack today. On the last race of the day, he decides to make a large enough bet on a longshot so that, if he wins, he will make up for his earlier losses and break even on the day. His friend Sue, who won more than she lost on the day, makes just a
Global Gas International offers to subcontract the Halidurton Heavy Construction Corporation to build an oil pipeline from Canada to New Orleans for $ 500 million. The probability that the oil pipeline will leak causing environmental damage is θ. If so, the legal liabilities will be $ 600 million.
The state of California set up its own earthquake insurance program for homeowners. The rates vary by ZIP Code, depending on the proximity of the nearest fault line. However, critics claim that the people who set the rates ignored soil type. Some houses rest on bedrock; others sit on unstable soil.
A firm spends a great deal of money on advertising to inform consumers of the brand name of its mushrooms. Should consumers conclude that its mushrooms are likely to be of higher quality than unbranded mushrooms? Why or why not?
You want to determine whether the market for single-engine airplanes has a lemons problem. Can you use any of the following information to help answer this question? If so, how? a. Repair rates for original- owner planes versus planes that have been resold b. The fraction of planes resold in each
Suppose that half the population is healthy and the other half is unhealthy. If an insured healthy person gets sick, the full cost to the insurance company is $ 1,000. If an insured unhealthy person gets sick, the cost to the insurance company is $ 10,000. In a given year, any one person (healthy
If you buy a new car and try to sell it in the first year—indeed, in the first few weeks after you buy it—the price that you get is substantially less than the original price. Use your knowledge about signaling and Akerlof’s lemons model to explain why this price is low.
Use Akerlof’s lemons model to explain why restaurants that cater to tourists are likely to serve low-quality meals. Tourists will not return to this area, and they have no information about the relative quality of the food at various restaurants, but they can determine the relative price by
Suppose that everyone in the used car example in the text is risk neutral, potential car buyers value lemons at $ 4,000 and good used cars at $ 8,000, the reservation price of lemon owners is $ 3,000, and the reservation price of owners of high-quality used cars is $ 7,000. The share of current
Many buyers value high-quality used cars at the full-information market price of p1 and lemons at p2. A limited number of potential sellers value high-quality cars at v1 ≤ p1 and lemons at v2 ≤ p2. Everyone is risk neutral. The share of lemons among all the used cars that might potentially be
It costs $ 12 to produce a low-quality stapler and $ 16 to produce a high-quality stapler. Consumers cannot distinguish good staplers from poor staplers when they make their purchases. Consumers value staplers at their cost of production and are risk neutral. The three firms in the market produce
In the world of French high cuisine, a three-star rating from the Michelin Red Guide is a widely accepted indicator of gastronomic excellence. French consumers consider Gault Milleau, another restaurant guide, not as authoritative as the Michelin guide because Gault Milleau, unlike Michelin,
Some sellers offer to buy back a good later at some prespecified price. Why would a firm make such a commitment?
Certain universities give written evaluations of student performance rather than letter grades. One rationale is that eliminating the letter-grade system reduces the pressure on students, thus enabling them to do better in school. Why might this policy help or hurt students?
Sometimes a group of hungry students will go to a restaurant and agree to share the bill at the end regardless of who orders what. What is the implication of this fee-sharing arrangement on the size of the overall bill? Why?
In 2012, a California environmental group found that 14 plum and ginger candies imported from Asia contained 4 to 96 times the level of lead allowed under California law (Lee, Stephanie M., “Lead Found in Asian Candies,” San Francisco Chronicle, August 14, 2012). Some observers predicted that
A promoter arranges for many different restaurants to set up booths to sell Cajun-Creole food at a fair. Appropriate music and other entertainment are provided. Restaurants agree to pay a share of their earnings to the promoter, but the promoter cannot monitor how much business each restaurant
The state of California set up its own earthquake insurance program. Because the state agency in charge has few staff members, it pays private insurance carriers to handle claims for earthquake damage. These insurance firms receive 9% of each approved claim. Is this compensation scheme likely to
A bank can make one of two types of loans. It can loan money to local firms, and have a 75% probability of earning $ 100 million and a 25% probability of earning $ 80 million. Alternatively, it can loan money to oil speculators, and have a 25% probability of earning $ 400 million and a 75%
Traditionally, doctors have been paid on a fee-for-service basis. Now doctors are increasingly paid on a capitated basis (they get paid for treating a patient for a year, regardless of how much treatment is required), though a patient may still have to pay a small fee each visit. In this
According to a flyer from Schwab Advisor- Source, “Most personal investment managers base their fees on a percentage of assets managed. We believe this is in your best interest because your manager is paid for investment management, not solely on the basis of trading commissions charged to your
Zhihua and Pu are partners in a store in which they do all the work. They split the store’s business profit equally (ignoring the opportunity cost of their own time in calculating this profit). Does their business profit-sharing contract give them an incentive to maximize their joint economic
Priscilla hires Arnie to manage her store. Arnie€™s effort is given in the left column of the table. Each cell shows the net profit to Priscilla (ignoring Arnie€™s cost of effort).Arnie€™s personal cost of effort is 0 at low effort, 10 at medium effort, and 30 at high
In the situation described in Question 4.4, how do your answers change if Arnie’s first contract changes so that he receives a basic fixed wage of 10 and, in addition, a bonus equal to 80% of any net income?
Suppose that an author of popular science fiction novels is paid a royalty of a share of the revenue from sales, where the revenue is R = pq, p is the competitive market price for such novels, and q is the number of copies of this novel sold. The publisher’s cost of printing and distributing the
Suppose now that the publisher in Question 4.6 faces a downward- sloping demand curve. The revenue is R(Q), and the publisher’s cost of printing and distributing the book is C(Q). Compare the equilibria for the following compensation methods in which the author receives the same total
A health insurance company tries to prevent the moral hazard of “excessive” dentist visits by limiting the visits per person per year to a specific number. How does such a restriction affect moral hazard and risk bearing?
Louisa is an avid cyclist who is currently working on her business degree. She normally rides an $ 800 bike to class. If Louisa locks her bike carefully—locks both wheels—the chance of theft for the term is 5%, but this careful locking procedure is time consuming. If she is less careful—just
Explain why full employment may be inconsistent with no shirking based on the efficiency wage model.
Starting in 2008, Medicare would not cover the cost of certain surgical mistakes, certain types of hospital-acquired infections, or other “preventable” mistakes (Liz Marlantes, “Medicare Won’t Cover Hospital Mistakes: New Rules Aimed at Promoting Better Hospital Care and Safety,” ABC
Many law firms consist of partners who share profits. On being made a partner, a lawyer must post a bond, a large payment to the firm that will be forfeited on bad behavior. How would such an arrangement reduce moral hazard problems?
When rental cars are sold on the used car market, they are sold for lower prices than cars of the same model and year that were owned by individual owners. Does this price difference reflect adverse selection or moral hazard? Could car rental companies reduce this problem by carefully inspecting
In the Managerial Solution, show that shareholders’ expected earnings are higher with the new compensation scheme than with the original one.
Curtis manages an electronics store in Wichita, Kansas. He considers carrying either cameras from Nikon Americas that come with a U.S. warranty or gray market Nikon cameras from a European supplier, which are the same cameras but their warranties are only good in Europe. The gray market cameras
If a policy change causes a Pareto improvement, is the outcome necessarily Pareto efficient? If a situation is Pareto efficient, are Pareto improvements possible? If a change occurs that causes a Pareto efficient outcome, is the change necessarily a Pareto improvement? Explain.
Does a Pareto improvement necessarily pass the cost- benefit test? Is the converse true? Explain.
A town council is considering building a new bridge over a small river that runs through the town to reduce congestion on the existing bridge and reduce com-muting times. Each of 1,000 commuters who must cross the bridge would experience a benefit of $ 15 per day from saving commuting time. The
Describe the market failures analyzed in Chapter 9 (monopoly) and Chapter 15 (asymmetric information).
Illustrate and describe the effects on output and welfare if the government regulates a monopoly so that it may not charge a price above p, which lies between the unregulated monopoly price and the economically efficient price ( determined by the intersection of the firm’s marginal cost and the
A monopoly drug company produces a lifesaving medicine at a constant cost of $ 10 per dose. The demand for this medicine is perfectly inelastic at prices less than or equal to the $ 100 ( per day) income of the 100 patients who need to take this drug daily. At a higher price, nothing is bought.
The price of wholesale milk dropped by 30.3% when the Pennsylvania Milk Marketing Board lowered the regulated price. The price to consumers fell by substantially less than 30.3% in Philadelphia. Why?
Suppose that the only two firms in an industry face the market (inverse) demand curve p = 100 – Q. Each has constant marginal cost equal to 10 and no fixed costs. Initially, the two firms compete as Cournot rivals (Chapter) and each produces an output of 30. Why might these firms want to merge to
In Question 3.1, now suppose that each firm has fixed costs, F, of 300. Merging would imply that the monopoly firm would pay fixed costs of 300. How would your answer change?
A maker of specialty soaps supplies a unique soap made from a cactus extract to the only two retailers in a small town. The producer sells the soap to the retailers at the marginal cost of production of the soap, $ 1 per bar, and receives 20% of the profit earned when the retailers sell the soap to
Why would an upstream producer of some product ever refuse to sell to downstream buyers who wish to buy the product at the going price?
According to a study in the New England Journal of Medicine, your friendships or “social networks” are more likely than your genes to make you overweight (Jennifer Levitz, “Can Your Friends Make You Fat?” Wall Street Journal, July 26, 2007, D1). If it is true that people who have overweight
When Star Wars Episode III: Revenge of the Sith opened at 12:01 A.M. Thursday, May 19, 2005, the most fanatical Star Wars fans paid $ 50 million for tickets to stay up until 3:00 to 4:00 A.M. Businesses around the country, especially those tied to high-tech industries, suffered reduced productivity
Let H = E – E be the amount that emissions, E, are reduced from the competitive level, E. The benefit of reducing emissions is B(H) = AHα. The cost is C(H) = Hß. If the benefit is increasing but at a diminishing rate in H, and the cost is rising at an increasing rate, what are the possible
Suppose that the inverse demand curve for paper is p = 200 – Q, the private marginal cost (unregulated competitive market supply) is MCp = 80 + Q, and the marginal external harm from emissions is MCx = Q. Determine the unregulated competitive equilibrium and the social optimum (where total
To the dismay of business travelers, airlines now discretely cater to families with young children who fly in first class (Katherine Rosman, “Frequent Criers,” Wall Street Journal, May 20, 2005, W1). Suppose the family’s value is $4,500 from traveling in first class and $ 1,500 from traveling

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