ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 11

(Week beginning May 20)

TASK 1

The market for new motor vehicles in a country is dominated completely by two
firms, Fastcars Ltd and Slowcars Ltd. Market revenue is fixed at $10 billion.
Each firm can choose whether to advertise. Advertising costs $1 billion for each
firm that advertises. If one firm advertises, and the other does not, then the
firm that advertises receives 100% of market revenue and pays for its
advertising. If both firms advertise they split the market revenue 50:50 and pay
for their respective advertising. If neither advertises they split the market
revenue 50:50 but without the expense of advertising.

a) What strategy would you advise that Fastcars Ltd should follow?
b) What would you predict will be the strategy chosen by each firm?
c) Is there an outcome that would make both firms better off? Why are not they
able to achieve this outcome?

TASK 2

Along a stretch of beach there are 300 children in 3 groups of 100 each. (Label
the groups A, B, and C.)

100
100 100
chil
chil chil
dre
dre dre
n
nA nB C

Two ice-cream vendors, Paddle and Pop, will each make a decision on where to
locate. Each vendor must choose to locate at one of the groups of children (that
is, at A, B or C). If there is one vendor at a group, all 100 children in that group
will buy ice-creams from that vendor. If there are two ice-cream vendors at a
group, then 50 children in that group will buy an ice-cream from each vendor.

For groups without a vendor, if the closest vendor is one group away then all
children in that group without a vendor are willing to walk to the next group
with the vendor to buy an ice-cream – with one vendor at this group then all
children walking from the neighbouring group will buy from that vendor; and
with two vendors at this group then 50% of children who walk will buy from
each vendor. If children do not have a vendor at their group, and are equi-distant
from two vendors, then one-half will buy from each of those vendors. If the
closest vendor for children in a group is two groups away, then no children
would walk to buy an ice-cream. For example, suppose both vendors are
1
located at A. Then children from B would be willing to walk to A to buy an ice-
cream, but children from C would not. Ice-cream melts quickly so you should
assume that children who walk to another group cannot buy for children who do
not walk.
Suppose Paddle and Pop make choices simultaneously on where to locate:
a) Construct the payoff matrix for this game.
b) Is there a strict dominant strategy equilibrium? Give an explanation of your
answers.

Task 1
a)
Slowcars
Advertise Not advertise
Fastcars Advertise 4,4 9,0
Not advertise 0,9 5,5

Fastcars has a strict dominant strategy to advertise. The game is symmetric so

Slowcars also has a strict dominant strategy to advertise. The nash equilibrium is
{Advertise; Advertise}. There is an outcome that would make both firm better off
{Not advertise; Not advertise} = {5; 5} They are not able to achieve thise because
each firm has an incentive to deviate.

Task 2
Pop
A B C
Padddle A 100,100 100,200 150,150
B 200,100 150,150 200,100
C 150,150 100,200 100,100
Nash equilibrium: {B; B} = {150; 150}
Both Paddle and Pop have strictly dominant strategy to go B.