# BUSI 620 Questions for Critical Thinking 5

September 14, 2016

Question
Questions for Critical Thinking 5

Salvatore Chapter 10:

Discussion Questions:
Question 3: What is the difference bween limit pricing and contestable markets

Question 8: I way does OPEC resemble a cartel? How successful is it?

Problems:
Problem: 1 Find the Herfadahl index composed of (a) three firms-one with 70% of the market, and the other 20 and 10 percent of the market respectively; (b) one firm with a 50% share of the market and the 10 other equal-sized firms (c) 10 equal sized firms.

Problem 14.Since nder price leadership by the dominant firm, the firms in the industry following the leader behave producing where the price set by the leader equals the sum of their marginal cost curves, the followers break een in the long run. True or False,? Explain.

Note:

1. P1: Use 70 instead of 70% in your Herfindahl index calculation (p.427).

Froeb et al. Chapter 10:

Individual problems: 10-4.
Question: 10-4; Examine the U.S. passenger airline industry using the Five Forces. Is this an attractive industry? Why or why not?

Five forces model =:

· Low threat of entry (high barriers to entry)

· Low supplier power

· Low threat from substitutes

· Low levels of rivalry between existing firms

Salvatore Chapter 11:

Discussion Questions:
Question 11: Do the duopolists in a Cournot equilibrium face a prisoners’ delimina? Explain.

Question 12. How did the 1971 law that banned cigarette advertising on television solve the prisoners’ dilemma for cigarette producers?

Problems: 2 – From the following matrix, where the payoff’s 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 stategy for each firm and (d) the Nash equilibrium. If there is one.

Firm B

Low Price

High Price

Low Price

(1,1)

(3, -1)

Firm A

High Price

(-2, 3)

(4, 2)

Problems: 6 – Explain why the playoff matrix in Problem 1 indicates that firms A and B face the prisoners’ dilemma.

Firm B

Low Price

High Price

Low Price

(1,1)

(3, -2)

Firm A

High Price

(-2, 3)

(2, 2)

Problems: 10 – Given the following payoff matrix, (a) indicate the best strategy for each firm. (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

Low Price

High Price

Low Price

(3,-1)

(3, 1)

Firm A

High Price

(4,5)

(6,3)

Note:

DQ12: 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.
P10(a): The strategies for firm A are low price and high price and the strategies for firm B are enter and don’t 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 et al. Chapter 15:

Individual problems: 15-4 and 15-5.
15-4 Salary Negotiation: The below figure 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 re-negotiate a ne employment contract by sending their an abortrator who chooses the best proposal (effectively giving one side or the other \$1million). Each side can choose to hire or not to 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 a lawyer or if both hire a 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.

· Diagram this simultaneous move game.

· What is the nash equilibrium of the game?

· Would the sides want to ban lawyers?

Note:

1. P15-5: Part of the payoff matrix looks like the following:

Management

No Lawyer

Lawyer

Labor

No Lawyer

\$ , \$500,000

\$ , \$

Lawyer

\$ , \$

\$300,000, \$

Submit this assignment by 11:59 p.m. (ET) on Sunday of Module/Week 5.

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