QCT #5 DUE DATE 11/20/2014 @ 17:00 CST HANDSHAKE $35
Oligopoly and Game Theory
Salvatore’s Chapter 10
Discussion Questions
2. (a) What are the advantages of the Herfindahl index over concentration ratios in measuring the degree of concentration in an industry? (b) What is the disadvantage of both?
8. In what way does OPEC resemble a cartel? How successful is it?
Problems
1. Find the Herfindahl index for an industry composed of (a) three firms— one with 70 percent of the market, and the other two with 20 and 10 percent of the market, respectively; (b) one firm with a 50 percent share of the market and 10 other equal-sized firms; (c) 10 equal- sized firms.
**Note: Use 70 instead of 70% in your Herfindahl index calculation (p. 415)
5. Starting with the reaction functions of duopolists A and B from Problem 4, find the Cournot solution algebraically.
**Note: The reaction function of duopolist A is
QA = (12-QB)/2 (1)
The reaction function of duopolist B is
QB = (12-QA)/2 (2)
Find the Cournot solution by substituting equation (1) into equation (2) and solve for QB then QA.
Froeb and McCann’s Chapter 10
Individual Problem
10-4 Five Forces and the Airline Industry
Examine the U. S. passenger airline industry using the Five Forces. Is this an attractive industry? Why or why not?
Salvatore’s Chapter 11
Discussion Questions
12. How did the 1971 law that banned cigarette advertising on television solve the prisoners’ dilemma for cigarette producers?
**Note: Explain first the prisoners’ dilemma for cigarette producers before 1971 law. Use table 11-4, replace Low Price with Advertise, and High Price with Don’t Advertise. You would see this is similar to the prisoners’ dilemma.
13. (a) What is the meaning of tit- for- tat in game theory? (b) What conditions are usually required for tit- for- tat strategy to be the best strategy?
Problems
2. From the following payoff matrix, where the payoffs are the profits or losses of the two firms, determine (a) whether firm A has a dominant strategy, (b) whether firm B has a dominant strategy, (c) the optimal strategy for each firm, and (d) the Nash equilibrium, if there is one. Firm B Low Price High Price Low Price (1, 1) (3, 21) Firm A High Price (21, 3) (4, 2)
**Correction: change the payoff cell (21, 3) to (-1, 3) and (3, 21) to (3, -1).
6. Explain why the payoff matrix in Problem 1 indicates that firms A and B face the prisoners’ dilemma.
**Correction: change the payoff cell (21, 3) to (-1, 3) and (3, 21) to (3, -1) in problem
10. Given the following payoff matrix, (a) indicate the best strategy for each fi rm. (b) Why is the entry-deterrent threat by firm A to lower the price not credible to firm B? (c) What could firm A do to make its threat credible without building excess capacity? Firm B Enter Don’t Enter Low Price (3, 21) (3, 1) Firm A High Price (4, 5) (6, 3)
**P10 (a): Correction: change the payoff cell (3, 21) to (3, -1). The strategies for firm A are low price and high price and the strategies for firm B are enter and do not enter. What is the best (optimal) strategy for each firm?
**P10 (b) is asking whether firm A would use the low price as a threat if firm B enters.
Froeb and McCann’s Chapter 15
Individual Problems
15- 4 Salary Negotiation
The following represents the potential outcomes of your first salary negotiation after graduation: Assuming this is a sequential move game with the employer moving first, indicate the most likely outcome. Does the ability to move first give the employer an advantage? If so, how? As the employee, is there anything you could do to realize a higher payoff?
15-5 Renegotiating Employment Contracts
Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator who chooses the best proposal (effectively giving one side or the other $ 1 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $ 200,000) who is effective at preparing the proposal in the best light. If neither hires lawyers or if both hire lawyers, each side can expect to win about half the time. If only one side hires a lawyer, it can expect to win three- quarters of the time. a. Diagram this simultaneous move game. b. What is the Nash Equilibrium of the game? c. Would the sides want to ban lawyers?
**Note:P15-5: Part of the payoff matrix looks like the following:
| Management | |||
| No Lawyer | Lawyer | ||
| Labor | No Lawyer | $ , $500,000 | $ , $ |
| Lawyer | $ , $ | $300,000, $ | |
References
APA References Required
QCT #6 DUE DATE 11/27/2014 @ 17:00 CST HANDSHAKE $40
Pricing Practices and Government Regulation
Salvatore’s Chapter 12
Discussion Questions
7. Quantity discounts are not a form of price discrimination because the firm saves on handling large orders. True or false? Explain.
11. How is the transfer price of an intermediate product determined when (a) there is no external market for the intermediate product, (b) a perfectly competitive external market for the intermediate product exists, and (c) an imperfectly competitive external market for the intermediate product exists?
13. What are (a) the advantages and (b) the disadvantages of cost- plus pricing? (c) Why is incremental cost pricing the correct pricing method? Why is full- cost pricing equal to it?
Problems
12. (a) Will a monopolist’s total revenue be larger with second- degree price discrimination when the batches on which it charges a uniform price are larger or smaller? Why? (b) How does a two- part tariff differ from bundling?
**Note: P12: You could use figure 12-4 as a reference (p. 492).
Spreadsheet Problem
Froeb et al’s Chapter 14
Individual Problems
14- 1 Barbie Dolls and Accessories
Why might Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls?
14- 4 Microwave Ovens
A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto- defrost feature. Female shoppers generally value microwaves more than men and attribute greater value to the auto- defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $ 70 and one with auto- defrost at $ 80 while women value a simple microwave at $ 80 and one with auto-defrost at $ 150. If there is an equal number of men and women, what pricing strategy will yield the greatest revenue? What if women comprised the bulk of microwave shoppers?
Salvatore’s Chapter 13
Discussion Questions
8. What is the basic difference between using a subsidy to induce producers to install antipollution equipment and a tax on producers who pollute?
10. Given the difficulties that the regulation of public utilities faces, would it not be better to nationalize public utilities, as some European countries have done? Explain your answer.
Problems
12. Determine whether the Justice Department would challenge a merger between two firms in an industry with 10 equal- sized firms, based on its 1984 Herfindahl- index guidelines only.
**Note: P12: Need to calculate Herfindahl index.
13. (Library research) Explain (a) in what way the U. S. trucking industry exemplified the capture theory hypothesis of government regulation prior to the passage of the Motor Carrier Act of 1980 and (b) the result of the passage of the Motor Carrier Act in 1980.
**Note: P13: Use the internet search or other sources to answer this problem.
15. Integrating Problem
From the following figure referring to a natural monopolist, indicate (a) the best level of output, price, and profits per unit and in total for the monopolist, (b) the best level of output and price with a lump sum tax that would eliminate all the monopolist’s profits, (c) the best level of output, price, and profits per unit and in total with a $ 3 per unit tax collected from the monopolist, and (d) the best level of output and profit per unit and in total if the government sets the price of the product or service at $ 10. (e) Which is the best method of controlling monopoly power? Why? (See Figure 13-5.)
**Note: P15: (b) A lump sum tax is a fixed cost, (c) a $3 per unit tax is a variable cost which will cause AC and MC to increase by $3.
References
APA References Required
QCT #7 DUE DATE 12/04/2014 @ 17:00 CST HANDSHAKE $35
Risk Analysis and Long-Term Investment Decisions
Salvatore’s Chapter 14
Discussion Questions
12. What is the rationale behind the minimax regret rule? What are some less formal and precise methods of dealing with uncertainty? When are these useful?
15. How does the adverse selection problem arise in the credit- card market? How do credit- card companies reduce the adverse selection problem that they face? To what complaint does this give rise?
Problems
Spreadsheet problem #1 **Note: Use table 14-4 as reference
Spreadsheet problem #2 **Note: Use tables 14-5 & 14-6 as reference
Froeb et al’s Chapter 17
Individual Problems
17- 1 Global Expansion
You are the manager of global opportunities for a U. S. manufacturer, who is considering expanding sales into Europe. Your market research has identified three potential market opportunities: England, France, and Germany. If you enter the English market, you have a 0.5 chance of big success (selling 100,000 units at a per- unit profit of $ 8), a 0.3 chance of moderate success (selling 60,000 units at a per- unit profit of $ 6), and a 0.2 chance of failure (selling nothing). If you enter the French market, you have a 0.4 chance of big success (selling 120,000 units at a per- unit profit of $ 9), a 0.4 chance of moderate success (selling 50,000 units at a per- unit profit of $ 6), and a 0.2 chance of failure (selling nothing). If you enter the German market, you have a 0.2 chance of huge success (selling 150,000 units at a per- unit profit of $ 10), a 0.5 chance of moderate success (selling 70,000 units at a per- unit profit of $ 6), and a 0.3 chance of failure (selling nothing). If you can enter only one market, and the cost of entering the market (regardless of which market you select) is $ 250,000, should you enter one of the European markets? If so, which one? If you enter, what is your expected profit?
17- 4 Disposing of Used Assets
Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for possible future product and estimates that the reservation value is $ 250,000. Your dealings on the second-hand market lead you to believe that there is a 0.4 chance a random buyer will pay $ 300,000, a 0.25 chance the buyer will pay $ 350,000, a 0.1 chance the buyer will pay 400,000, and a 0.25 chance it will not sell. If you must commit to a posted price, what price maximizes profits?
Froeb et al’s Chapter 19
Individual Problems
19- 5 “Soft Selling” and Adverse Selection
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you are trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal
19-6 Hiring Employees
You need to hire some new employees to staff your start- up venture. You know that potential employees are distributed throughout the population as follows, but you cannot distinguish among them:
| Employee Value | Probability |
| $50,000 | 0.25 |
| $60,000 | 0.25 |
| $70,000 | 0.25 |
| $80,000 | 0.25 |
What is the expected value of five employees you hire?
**Note: Need to consider the adverse selection
**Note: Consider with and without the adverse selection
Salvatore’s Chapter 15
Discussion Questions
7. (a) When can the NPV and the IRR methods of evaluating investment projects provide contradictory results? (b) How can this arise? (c) Which method should then be used? Why?
Problems
8. John Piderit, the general manager of the Western Tool Company, is considering introducing some new tools to the company’s product line. The top management of the firm has identified three types of tools (referred to as projects A, B, and C). The various divisions of the firm have provided the data given in the following table on these three possible projects. The company has a limited capital budget of $ 2.4 million for the coming year. (a) Which project(s) would the firm undertake if it used the NPV investment criterion? (b) Is this the correct decision? Why?
Note: Remember the firm has a limited capital budget of $2.4 million for the coming year. In other words, the firm faces the capital rationing and should use the profitability index as its investment criterion (pp. 637–640).
10. The MacBurger Company, a chain of fast- food restaurants, expects to earn $ 200 million after taxes for the current year. The company has a policy of paying out half of its net after- tax income to the holders of the company’s 100 million shares of common stock. A share of the common stock of the company currently sells for eight times current earnings. Management and outside analysts expect the growth rate of earnings and dividends for the company to be 7.5 percent per year. Calculate the cost of equity capital to this firm.
**Note: Use the dividend valuation model (pp. 642–643). “A share of the common stock of the company currently sells for eight times current dividends.”
Spreadsheet Problem
**Note: Spreadsheet problem: Change the present value coefficient from 1/ (1+0.5) n to 1/ (1+0.05) n. That is the discount rate of 5% instead of 50%
References
APA references required
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