Question :
104) On January 2, 1971, all cigarette advertising was banned : 1244671
104) On January 2, 1971, all cigarette advertising was banned on U.S. television and radio stations. Did this ban likely increase or decrease the profits of cigarette companies in 1971? Briefly explain.
105) Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they advertise, they can both sell more whiskey and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distiller increases its market share and also its profit.
b.If Laphroaig wants to maximize profit, will it advertise? Briefly explain.
c.If Knockando wants to maximize profit, will it advertise? Briefly explain.
d.Is there a dominant strategy for each distiller? Briefly explain.
Table 11-14
106) Refer to Table 11-14. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world’s largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Use the payoff matrix in Table 11-14 to answer the following questions.
a.What is the dominant strategy for Saudi Arabia?
b.What is the dominant strategy for Yemen?
c.What is the Nash equilibrium?
107) There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options:
i.They continue to collude (no cheating) and make $12 million each in profits.
ii.One firm cheats and the other does not. The firm that cheats makes a profit
of $14 million whereas the firm that doesn’t makes a profit of $9 million.
iii.They both cheat and each firm makes a profit of $7 million.
a.Construct a payoff matrix for these two firms.
b.How does this situation relate to the prisoner’s dilemma?
c.If each firm acted noncooperatively, how much profit would each make?
d.Are the firms better off colluding (with no cheating) or competing? Explain.
108) Assume that two interior design companies, Alistair and Baine, are competing for customers and if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn’t, the firm that advertises earns $40 million in profit while the other earns $20 million in profit.
a. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player.
b. Does each firm have a dominant strategy and if so what is it?
c. What is the Nash equilibrium?
109) Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they advertise, they can both sell more whiskey and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distiller increases its market share and also its profit.
a.Construct a payoff matrix using the following hypothetical information: If neither distiller advertises: each earns a profit of $35 million per year. If both advertise: each earns a profit of $20 million per year. If one advertises and the other does not: the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million.
b.If the two distillers agree to coordinate their strategies, what is the outcome?
Table 11-15
110) Refer to Table 11-15. Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world’s largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output.
a.Create a new payoff matrix that reflects Saudi Arabia’s willingness to pay Yemen $25 million to produce a low output.
b.What is the dominant strategy for each country in this new game?
c.What is the new Nash equilibrium?
