Liberty University ECON 213 Problem Set chapter 13 complete solutions correct answers updated

Liberty University ECON 213 Problem Set chapter 13 complete solutions correct answers updated

Part 1   (1 point)

If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would then increase from $375 to   $  . (Provide your answer to two decimal places.)

Part 2   (1 point)

If Aquataste reneges on the agreement and produces 350 gallons, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would increase to   $  , which is better than the $312.50 Waterland would earn by sticking with the agreement. (Provide your answer to two decimal places.)

01Question

The following table reports the four-firm concentration ratio for five different industries:
 

Refer to the table above. In which industry do the four largest firms have the most market power?
 

Refer to the table above. In which industry do the four largest firms have the least market power?

02Question

Consider a cartel, the Organization of the Rice Exporting Companies (OREC), which is a group of rice-exporting countries. Although OREC has eight members, let’s keep it simple and assume there are only two: China and Vietnam. The figure below shows the payoff matrix for the game.
 

Each country must choose how much rice to produce, either low output or high output. Note that this payoff matrix is not symmetric. At any outcome, China makes more money than Vietnam because China is the dominant member of OREC.

If the countries colluded,

China’s dominant strategy is to produce a

Vietnam’s dominant strategy is to produce a

The Nash equilibrium for these two countries is

Suppose that the countries try to cooperate over a longer time. Although this strategy allows the countries to develop strategies like tit-for-tat, which may sustain collusion, cartel members may still try to cheat. Which of the two countries is more likely to cheat on a cartel agreement?

03Question

Rachel and Joey are two students who are dating. Before they left for class this morning, they decided to meet for dinner in the evening. After their last class, they go home and get ready for their date. Unfortunately, although they both remember the time—7:00 p.m.—neither of them can remember where they agreed to meet: Clementine or Beyond. Also, there is no way for them to contact each other before 7:00 p.m.

Where should they go? Let’s assume that Joey prefers Clementine to Beyond, but Rachel prefers Beyond to Clementine. Joey loves Rachel, however, so he would rather be with her at Beyond than by himself at Clementine. Rachel loves Joey, so she would rather be with him at Clementine than by herself at Beyond. The figure below is the payoff matrix, where the payoffs are measured in utils (happy points). 
 

What is Joey’s dominant strategy?

What is Rachel’s dominant strategy?

What is the Nash equilibrium?

04Question

Indicate whether each group or association benefits from network externalities.

Network externalities are important because

05Question

The following table shows your neighorhood’s demand for drinking water. Assume that only two firms (Waterland and Aquataste) produce and sell water in this market. Each firm offers the same quality, no fixed costs are incurred in the production of water, and each firm’s marginal cost is constant and equal to $0 because both companies can pump as much water as needed without cost. Because marginal cost is constant and equal to $0, total revenue is equal to total profit. 

Assume Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750.

If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would then increase from $375 to (Provide your answer to two decimal places.)

If Aquataste reneges on the agreement and produces 350 gallons, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would increase to     which is better than the $312.50 Waterland would earn by sticking with the agreement. (Provide your answer to two decimal places.)

06Question

You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work.
 
Your dominant strategy is to

Your partner’s dominant strategy is to

What is the likely outcome?

If you and your partner are required to work together on a number of projects throughout the semester, what other possible outcome might you be able to sustain?

07Question

Suppose that the marginal cost of mining gold is constant at $300 per ounce and the demand schedule is as follows:

If the number of suppliers is large, what would be the price of gold?

What would be the quantity?

If there is only one supplier, what would be the price of gold?

What would be the quantity?

If there are only two suppliers and they form a cartel, what would be the price of gold?

Assuming the two suppliers each produce equal amounts, how much gold would each supplier produce?

Suppose that one of the two cartel members in Part 3 decides to increase its production by 1,000 ounces while the other member keeps its production constant. What will happen to the revenues of both firms?

08Question

A small town has only one pizzeria, the Pizza Factory. A small competitor, Perfect Pies, is thinking about entering the market. The profits of these two firms depend on whether Perfect Pies enters the market and whether the Pizza Factory—as a price leader—decides to set a high price or a low price. Use the payoff matrix below to answer the questions that follow.
 

The dominant strategy of the Pizza Factory is to

The dominant strategy of Perfect Pies is to

What is the Nash equilibrium in this situation?

The combined profit for both firms is highest when the Pizza Factory sets a high price and Perfect Pies stays out of the market. If Perfect Pies enters the market, how will the profits of the Pizza Factory be affected?

Would the Pizza Factory be willing to pay Perfect Pies not to enter the market? 

09Question

The following payoff matrix depicts two companies, Lowe's and Home Depot, in an advertising game. The companies will be playing the same game several times. Each company makes its decision without knowing what the other chooses. The payoffs for each firm represent economic profits.

Imagine that at the beginning of each week, Home Depot and Lowe's play the game described in the payoff matrix above. Assume there is no known end to the game, so Home Depot and Lowe's will effectively be playing an infinite number of rounds. The possible payoffs are the same in all rounds played.
 
In the first week, neither Home Depot nor Lowe's offered a coupon, and each earned $150 million. In the second week, Home Depot offered a 10% off coupon and Lowe's did not offer a coupon. From the third round onward, assume that both players will play a strict tit-for-tat strategy.

In the third week, Home Depot earns a profit of  and Lowe's earns a profit of

In the fourth week, Home Depot earns a profit of  and Lowe's earns a profit of

10Question

Barry and Iris are playing Ping-Pong. Both have equal ability, and each point comes down to whether the players guess correctly about the direction the other player will hit.

Look at the payoff matrix provided above. What is the Nash equilibrium for Barry and Iris? 

11Question

Trade agreements encourage countries to reduce tariffs so that goods may flow across international boundaries with fewer restrictions. Using the following payoff matrix, determine the best policies for China and the United States in this example.
 

The dominant strategy for the United States is to institute

China’s dominant strategy is to institute

What is the outcome?

Suppose the United States and China enter into a trade agreement in which both countries agree to reduce tariffs. What other possible Nash equilibrium could they sustain?