Solved: 1 Arrows up or down If we move from the

1. Arrows up or down: If we move from the cartel outcome to the duopoly outcome, the price
___________, the quantity per firm __________, and the profit per firm __________.
2. A dominant strategy is the strategy that allows one firm to dominate the market__________.
(True/False)
3. The duopolists dilemma is that each firm would make more profit if both picked the
__________price, but both firms pick the __________price.
4. In a Nash equilibrium, each player is doing the best he or she can, given __________.
5. In Figure rectangle 3 is not a Nash equilibrium because if __________picks a(n) __________
price, the best response of __________is to pick the price.

6. In Figure, suppose Jack promises Jill that if she picks the high price, he will too. Is this
promise credible? Explain.

7. Buzz and Moe are duopolists in the lawn-care market. The following game tree shows the
possible pricing outcomes and their payoffs. The outcome of the pricing game is that Buzz will
pick the __________price and Moe will pick the __________price.

8. Vitamin Market Areas. Beta and Gamma produce vitamin A at a constant average cost of $5
per unit. Assume that low-price guarantees are illegal. Here are the possible outcomes: Price
fixing (cartel). Each firm sells 30 units at a price of $20 per unit.
Duopoly (no price fixing). Each firm sells 40 units at a price of $12 per unit.
Underpricing (one firm charges $20 and the other charges $12). The low-price firm sells 70 units
and the high-price firm sells 5 units.
a. Suppose Beta chooses a price first, followed by Gamma. Draw a game tree for the price-
fixing game and predict the outcome.
b. Suppose the firms agree to pick the high price. Once Beta picks the high price, how much
more could Gamma earn if it cheated on the pricefixing agreement?
c. Suppose the firms divide the market into two areas of equal size and assign each firm one of
the areas. Each firm agrees to sell only in its assigned areas. Will this arrangement generate a
successful cartel?
9. Airporter Price Fixing? Hustle and Speedy provide transportation service from downtown to
the city airport. Assume that low-price guarantees are illegal. The average cost per passenger is
constant at $10. Here are the possible outcomes:
Price fixing (cartel). Each firm has 15 passengers at a price of $25.
Duopoly (no price fixing). Each firm has 20 passengers at a price of $20.
Under pricing (one firm charges $20 and the other charges $25). The low-price firm has 28
passengers and the high-price firm has 5 passengers.
Hustle chooses a price first, followed by Speedy. Draw a game tree for the price-fixing game
and predict the outcome.

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 10. Hotel Price Fixing? Waikiki Beach has two hotels, one run by Juan and a second run by
Tulah. The average cost of providing rooms is constant at $30 per day. Assume that low-price
guarantees are illegal. Here are the possible outcomes:
Price fixing (cartel). Each firm has 30 customers at a price of $40.
Duopoly (no price fixing). Each firm has 40 customers per day at a price of $37.
Underpricing (one firm charges $40 and the other charges $37). The low-price firm has 50
customers and the high-price firm has 10 customers.
Juan chooses a price first, followed by Tulah. Draw a game tree for the price-fixing game and
predict theoutcome.

ANSWER
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