ECO331
Practical 4 (Take-home Task)
Due: 18 May 2020
Note: The following questions are aimed at applying your knowledge of the theory
discussed during the lectures. The purposes of the sessions are to provide a guide to the
methodology applied and not a memorandum.
Instructions:
1. Insert your surname, initials and student number on your answer sheet. Please
remember to write these details on each page and number the page in the top righthand corner, especially when attaching pictures of separate pages.
2. Please write in a neat legible print. (Typing optional)
3. Submit your answers by end of day to the Dropbox folder.
4. Penalties (-30% or 6 marks) will be applied for plagiarism and copying.
Question 1 (Chapter 13)
~~~~~~~~~~~~~~~~~~~~~~~~~
Buy-right is a chain of grocery stores operating in small cities throughout the southwestern
United States. Buy-right’s major competition comes from another chain, Acme Food Stores.
Both firms are currently contemplating their advertising strategy for the region. The possible
outcomes are illustrated by the payoff matrix below.
Entries in the payoff matrix are profits. Buy-right’s profit is before the comma, Acme’s is
after the comma.
1.1
1.2
1.3
Describe what is meant by a dominant strategy.
[1]
Given the payoff matrix above, does each firm have a dominant strategy?
[3]
Under what circumstances would there be no dominant strategy for one or both
firms?
[1]
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Question 2 (Chapter 13)
Two firms at the St. Louis airport have franchises to carry passengers to and from hotels in
downtown St. Louis. These two firms, Metro Limo and United Limo, operate nine passenger
vans. These duopolists cannot compete with price, but they can compete through
advertising.
Their payoff matrix is below:
2.1
2.2
Does each firm have a dominant strategy? If so, explain what that strategy is.
[3]
What is the Nash equilibrium? Explain where the Nash equilibrium occurs in the
payoff matrix.
[3]
Question 3 (Chapter 13)
Consider two firms, X and Y, which produce super computers. Each can produce the next
generation super computer for the military (M) or for civilian research (C). However, only
one can successfully produce for both markets simultaneously. Also, if one produces M, the
other might not be able to successfully produce M, because of the limited market. The
following payoff matrix illustrates the problem.
3.1
3.2
Find the Nash equilibrium, and explain why it is a Nash equilibrium.
[4]
If Firm X were unsure that the management of Firm Y was rational, what would Firm
X choose to do if it followed a maximin strategy? What would both firms do if they
both followed a maximin strategy?
[5]
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