Question 6

The Table below shows the total demand for cable TV subscriptions for a monopoly. Assume that the monopolist incurs an annual fixed cost of $100,000 and that the marginal cost of providing an additional subscription is always $100.

Quantity

Price (per year)

0

$400

2,000

$350

4,000

$300

6,000

$250

8,000

$200

10,000

$150

12,000

$100

14,000

$50

16,000

$0

(a)What is the profit maximising level of quantity and price? What is the profit at this level of output? Explain your answers using the concept of marginal revenue and marginal cost.(4 marks)

(b)The following table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B).

B

Right

Left

A

Up

(2, 2)

(3, 3)

Down

(1, 1)

(4, 0)

Critically analyse the following (remember to justify your answers):

(i)Is Up-Right a Nash equilibrium?(1 mark)

(ii)Is Up-Left a Nash equilibrium?(1 mark)

(iii)Is Down-Right a Nash equilibrium?(1 mark)

(iv)Is Down-Left a Nash equilibrium?(1 mark)