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Price and output

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1) The following matrix shows the payoffs for an advertising game between Combra and Paka. The
firms can choose to advertise or to not advertise. Numbers in the matrix represent profits; the first number in each cell is the payoff to Combra. (Numbers in millions.)
Combra (rows)/Paka (columns) Advertise Donâ??t Advertise
Advertise (100, 100) (5000, -500)
Donâ??t Advertise (-500, 5000) (1000, 1000)

a. Is this a Prisonerâ??s Dilemma? (Yes or NO).Explain why this would be described as a Prisoner's Dilemma game.
b. Is there a dominant strategy? (Yes or NO). Explain the probable outcome of this game.


a. What is the firmâ??s Total Revenue ?
b. What is the Total Cost?
c. What is the firmâ??s Total Profits?
d. If the above monopolist were to behave like a Monopolistically competitive firm (operating in the long run), determine its Price and output.

3.Suppose that the market demand for mountain spring water is given as follows:
P = 1200 â?" Q. Mountain spring water can be produced at no cost. What is the profit maximizing level of output and price of a monopolist?

4.When one automaker begins offering low cost financing or rebates, others tend to do the same.
What two oligopoly models might offer an explanation of this behavior?

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Solution Preview

1. Yes, the game is a prison's dilemma. It resembles a prison's dilemma game because

1) it has one nash equilibrium
2) it is symmetric
3) the most optimal outcome is not the Nash Equilibrium

Dominate strategy is Advertise, and the probable outcome is (advertise, advertise).

2. a Total Revenue = price X quantity = AE

total cost = ATC X quantity = HE

total profit = total revenue - total cost = AE -HE = (A-H)E

If the firm is monopolistic competition, it claims no economic ...