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What is Alex’s dominant strategy?

  • Top
  • Both strategies are equally dominant
  • Bottom
  • No dominant strategy exists (correct)

    • What is Bob’s dominant strategy?

  • Both strategies yield equal payoffs
  • No dominant strategy exists
  • Right (correct)
  • Left

    • If Alex chooses Bottom, what is the externality caused by Bob when he chooses Left instead of Right?

  • 18 (correct)
  • -8
  • -6
  • 12

    • Which strategy pair represents a Nash Equilibrium in this game?

    <p>(Bottom, Left)</p> Signup and view all the answers

    Using backward induction, what is the equilibrium strategy pair for Delta and United Airlines?

    <p>(Detroit, Detroit)</p> Signup and view all the answers

    If Bob chooses Left, what is the payoff for Alex if he plays Top?

    <p>15</p> Signup and view all the answers

    What is the payoff for Bob if Alex chooses Bottom and he chooses Right?

    <p>6</p> Signup and view all the answers

    Which of the following strategies leads to higher individual payoffs for both players?

    <p>Both select different routes</p> Signup and view all the answers

    What is the first-mover advantage referring to in game theory?

    <p>The player who moves first may establish a strategic position.</p> Signup and view all the answers

    In the provided game between Uber and Lyft, what is the equilibrium strategy using backward induction?

    <p>(High price, High Price)</p> Signup and view all the answers

    In the sequential game between Taylor and Billie, what strategy will Taylor likely choose if she dislikes losing when she chooses Tails?

    <p>Always choose Heads.</p> Signup and view all the answers

    What outcome does Billie prefer in the game against Taylor?

    <p>To have different choices than Taylor.</p> Signup and view all the answers

    Using backward induction, what should both players aim for to reach an equilibrium in Taylor and Billie's game?

    <p>Both players choose Heads.</p> Signup and view all the answers

    What does the payoff of 18 represent in the Uber and Lyft game?

    <p>The maximum payoff for Uber when both choose High pricing.</p> Signup and view all the answers

    If both players in the sequential game avoid losing by matching choices, what outcome might that lead to?

    <p>Frequent draws.</p> Signup and view all the answers

    What does it mean if a firm is experiencing economies of scale between 15 and 20 units of output?

    <p>Average total cost is falling.</p> Signup and view all the answers

    At which price does revenue reach its maximum according to the given data?

    <p>At a price of 3.</p> Signup and view all the answers

    What is the marginal revenue when the price is set at $3?

    <ol> <li></li> </ol> Signup and view all the answers

    What is the marginal cost at a price of $1?

    <ol> <li></li> </ol> Signup and view all the answers

    If a firm has a marginal cost of $1 and an own-price elasticity of demand of -1.1, what is the profit-maximizing price?

    <p>$1.91.</p> Signup and view all the answers

    According to the Inverse Elasticity Pricing Rule, what happens when demand is less elastic?

    <p>Price should be set higher than marginal cost.</p> Signup and view all the answers

    If a product has a price elasticity of demand of -2 and the marginal cost is $10, what is the optimal price to maximize profit?

    <p>$20.</p> Signup and view all the answers

    What should Firm A do if it has a marginal cost of $5 and is pricing its product at $15, given the elasticity of demand is -2?

    <p>Firm A should decrease the price.</p> Signup and view all the answers

    How many popsicles does Adrian sell when maximizing profits?

    <p>250</p> Signup and view all the answers

    What is the profit-maximizing price for Adrian's popsicles?

    <p>$9.5</p> Signup and view all the answers

    If Adrian charges $3 per popsicle, what will his variable profit be?

    <p>$2645</p> Signup and view all the answers

    What is the deadweight loss when Adrian charges $3 for a popsicle?

    <p>$20</p> Signup and view all the answers

    What must be true about students' price elasticity compared to regular customers based on Amazon's pricing?

    <p>Students must be more price elastic than the typical Amazon customer.</p> Signup and view all the answers

    Which type of price discrimination does Amazon's student discount represent?

    <p>Market segmentation</p> Signup and view all the answers

    For which group will the per-membership variable profits be greater?

    <p>Regular memberships</p> Signup and view all the answers

    Which of the following is an example of price discrimination?

    <p>Charging different prices for the same product based on customer type</p> Signup and view all the answers

    Fixed costs change when the quantity of output changes.

    <p>False</p> Signup and view all the answers

    Rent on a warehouse for a t-shirt manufacturing company is considered part of which type of costs?

    <p>Fixed costs</p> Signup and view all the answers

    If a firm’s output doubles and its total costs also double, what is the firm experiencing?

    <p>Constant returns to scale</p> Signup and view all the answers

    When marginal cost is above average total cost, what happens to the average total cost?

    <p>It must be increasing</p> Signup and view all the answers

    Where is profit maximized for a firm?

    <p>Where marginal revenue equals marginal cost</p> Signup and view all the answers

    If a firm is maximizing its profit with a markup of 0.5, what is the elasticity for that firm's product?

    <p>-2</p> Signup and view all the answers

    What does the Lerner Index represent?

    <p>Markup as a function of elasticity</p> Signup and view all the answers

    What does backward induction help find in a sequential game?

    <p>Subgame perfect equilibrium</p> Signup and view all the answers

    Study Notes

    True/False

    • Fixed costs do not change with the quantity of output produced, therefore option A is false
    • Rent on a warehouse is a fixed cost because it does not change with the change in the production volume
    • Economies of scale occur when output doubles, but costs increase by less than double, therefore option C is false
    • If marginal cost is above average total cost, then the average total cost will increase, confirming option D as true
    • Profit is maximized at the point where marginal revenue equals marginal cost, not where total revenue equals total cost.
    • A firm should produce at the level where marginal revenue equals marginal cost, this is the point of profit maximization
    • A firm's markup is equal to the inverse of the elasticity, meaning a markup of 0.5 means the elasticity of demand is -2
    • The Lerner Index and markup are equal to the inverse of the elasticity of demand
    • Backward Induction allows us to find the equilibrium outcome in a sequential game
    • A dominant strategy is the best strategy for a player regardless of what the other player does, making option B true

    Multiple Choice

    • Between 15 and 20 units, the firm is experiencing diseconomies of scale, meaning as output increases, costs increase at a faster rate
    • Revenue is maximized at the price of 3, this is the point where the marginal revenue is zero or close to zero
    • At a price of 3, the marginal revenue is 4-3=1
    • At a price of 1, the marginal cost is 21-17=4
    • The firm's profit maximizing level of output is 4, this is the point where marginal revenue equals marginal cost and total revenue is maximized
    • The profit maximizing price is calculated by dividing the marginal cost by 1 plus the inverse of demand elasticity: 1/(1+(-1.1)) = 1/0.1 = 10, therefore the price is $11
    • The Inverse Elasticity Pricing Rule states that a firm should set a higher price when demand is less elastic, meaning that the firm can charge a higher premium
    • The price of a product that maximizes profit is calculated using the formula: MC/(1+1/|ED|) = 10/(1+1/2) = 10 * 2/3 = 20/3 = 6.67, with the nearest option being 10
    • Because the firm has a price of 15,amarginalcostof15, a marginal cost of 15,amarginalcostof5, and an elasticity of -2, the firm is maximizing their profit because the price is calculated using the Inverse Elasticity Pricing Rule: 5/(1+1/2)=5/(1+1/2)= 5/(1+1/2)=5 * 2/3 = 10/3=10/3 = 10/3=3.33. A price of $15 is optimal if the firm is able to charge a premium to maximize profits.
    • Alex's dominant strategy is Top, because the payoffs are always higher with Top, regardless of Bob's strategy
    • Bob's dominant strategy is Left, because regardless of Alex's strategy, the payoffs are always higher with Left
    • The externality caused by Bob choosing Left is the difference in payoffs between Left and Right for Alex with Bottom: 12-6= 6
    • The Nash Equilibrium of the game is (Bottom, Left)
    • In this sequential game, the equilibrium outcome is (Atlanta, Detroit), where Delta chooses Atlanta first, prompting United to choose Detroit
    • The equilibrium outcome implies that Delta has a first-mover advantage, as it gets its preferred route
    • The equilibrium outcome is (High price, Low price), meaning Uber has a first-mover advantage, ensuring a payoff advantage
    • The equilibrium outcome is (Tails, Heads), as Taylor chooses Tails second, anticipating Billie's choice of Heads, making Tails the more advantageous strategy
    • The equilibrium outcome suggests a second-mover advantage, as the second player has the advantage of knowing the first player's strategy and adjusting their own
    • When Adrian is maximizing profits, he will sell 250 popsicles, this is calculated by setting MR and MC equal to each other and solving for Q
    • The profit-maximizing price is $9.5, this is calculated using the demand function and the quantity obtained by maximizing profit
    • If Adrian charges 3perpopsicle,hisvariableprofitwillbe3 per popsicle, his variable profit will be 3perpopsicle,hisvariableprofitwillbe2645, this is calculated as (Price - MC) * Q = (3-2)*250 = $250
    • The deadweight loss from charging 3is3 is 3is20, this is the area of the triangle between the demand curve, MR, and MC, from the point where MC and MR intersect to the point where the demand curve and price intersect
    • The Amazon Prime student membership plan implies that students are more price-elastic than regular customers
    • This type of pricing is considered market segmentation price discrimination, targeting a specific customer group with a lower price
    • Considering the lower price of student memberships and the same marginal costs, Amazon makes greater per-membership variable profits from regular memberships
    • The question describes price discrimination, defined as charging different prices for the same product based on customer demographics, location, or willingness to pay.

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