NAME_______________________________________________________________ FE461 Practice Problem Third Problem Set Due March 6th 1. (50 points) Most wireless packages include cell phone minutes and text messages. Suppose AT&T wireless (the wireless provider previously known as Cingular, that was previously known as AT&T) has determined that six people purchase cell phone minutes and text messages (you can interpret them as six equally represented types). The following table represents the willingess to pay for cell phone minutes and the willingness to pay for text messages for the six different people (Bob, Bill, Tom, Sue, Julie, and Mary). The marginal cost to AT&T for cell phone minutes is 3; the marginal cost to AT&T for a text message is 2. Person Willingness to pay Willingness to Combined WTP for telephone pay for a text minutes message Bob 10 15 25 Bill 5 10 15 Tom 20 0 20 Sue 18 2 20 Julie 11 9 20 Mary 10 10 20 a) (10 points) What price will AT&T charge for cell phone minutes if it can only set a uniform price (and it does not bundle)? b) (10 points) What price will AT&T charge for text messages if it can only set a uniform price (and it does not bundle)? c) (10 points) What price will AT&T charge for a pure bundle (cell phone minutes and text messaging)? d) (10 points) What price will AT&T charge for a mixed bundle (cell phone alone, text messaging alone, and bundling cell phone minutes and text messaging)? e) (10 points) Which is more efficient, no bundling (parts a and b), the pure bundle (part c), or the mixed bundle (part d)? Explain. Steerage 2. (15 points) The following game has two players, Steerage and Drydock. On a Tuesday night, King Hall is serving meatloaf. Most Mids don’t like meatloaf, so no one is planning to eat in King Hall. Steerage and Drydock realize the consequences of bad King Hall food, and each plan to start cooking food early in order to manage the huge, disgusted crowd. Assume Steerage and Drydock will each only prepare one menu item in advance, and will offer a special deal to get Mids to choose that item over the rest of the menu. They can choose one of the three most popular menu items: Pizza, Mike Schwobs, or Wraps. The payoffs are listed below. Identify all Nash pure strategy Equilbria. Drydock Pizza Mike Schwobs Wraps Pizza 7500, 7500 11000, 10000 10000, 7000 Mike Schwobs 13000, 9500 10500, 6500 14000, 5500 Wraps 2500, 9250 6250, 9000 6500, 6500 3. (10 points) In your own words, what makes a static game a “prisoner dilemma” game? 4. (25 points) Two firms face a market demand of P = 300 – 10Q. Firms face identical marginal costs equal to 60. a) (5 points) Find each firm’s best response function – be sure to solve for these through profit maximization. b) (10 points) Graph the best response functions – indicating the axis (so you need qmonopoly and qperfect competition). c) (10 points) Find the profit maximizing (Cournot-Nash equilibrium) quantities for each firm.