agree to withhold excess supplies from the market in order to
maintain higher prices.
b. If each member’s compensation is based on the team’s overall
performance, there is the incentive to take a “free ride” on the efforts
of other members. (If it is a 10-member team, one member
contributes only 10 percent to the overall performance.) Countering
the prisoner’s dilemma may mean monitoring work effort or
increasing the rewards for individual performance.- a. For firm 1, P 1 75 .5P 2 Q 1. Setting MR 1 MC, we have 75
.5P 2 2Q 1 30, implying Q 1 22.5 .25P 2. Substituting this
solution for Q 1 into the price equation, we find: P 1 52.5 .25P 2.
b. A lower P 2 shifts firm 1’s demand curve inward, causing firm 1 to set a
lower price.
c. Solving P 1 52.5 .25P 1 , we find P 1 P 2 $70. From the demand
equations, Q 1 Q 2 40. Each firm’s profit is $1,600. - a. The unique equilibrium has firm B setting a price slightly below $7.50
(the next lowest cost) and serving the entire market.
b. No, firm B would continue to bid $7.50 to maximize its contribution
toward its fixed cost. However, if B’s fixed costs are so large so as to
imply losses, the firm would exit the market in the long run. - a. Rearranging the price equation shows that raising A increases sales.
Advertising spending is a fixed cost (doesn’t vary with output).
b. Setting MR MC, we have 50 A.52Q 20 or Q 15 .5A.5.
Substituting this solution for Q into the price equation, we find:
P 35 .5A.5. If advertising is increased, the firm should plan for
increased sales at a higher price.
c.(P 20)Q A (15 .5A.5)(15 .5A.5) A 225
15A.5 .75A. Setting d/dA 0 implies: 7.5/A.5 .75 0. Thus,
A 100. In turn, Q 20 units and P $40.
Chapter 10
- In a Nash equilibrium, each player’s chosen strategy is optimal, given the
strategy of the other. Thus, neither side can profit by unilaterally
deviating. By comparison, a dominant strategy is optimal against any
strategy the other player might choose. - a. Firm Y has no dominant strategy or any dominated strategy. For firm
Z, C3 is dominated by C1.
b. Once C3 is eliminated from consideration, R1 is dominated by R2.
With R1 eliminated, C2 is dominated by C1. Thus, C1 is firm Z’s
optimal choice, and R2 is firm Y’s optimal response.
16 Answers to Odd-Numbered ProblemsBMAns.qxd 9/26/11 11:18 AM Page 16