Aditi srinivasan

2010110035
QUIZ 3
MEC

4. Following is the game matrix. Find out the Nash Equilibrium (3 points)

This is a case of players with opposing preferences

According to this game matrix the interests of the players are opposite

Player 1 is willing to take the same action as Player 2, but Player 2 is willing to do the opposite
of player 1 i.e One person wants to be like the other, whereas the other wants to be different

Case 1
(A,A)
Player 2 can increase its net benefit from 1 to 2 by choosing the plan B rather than plan A

(A,B)
Player 1 can increase its net benefit from 1 to 2 by choosing plan B rather than plan A.

(B,A)
Firm 1 can increase its net benefit from 1 to 2 by choosing plan A rather than plan B.

(B,B)
Firm 2 can increase its net benefit from 1 to 2 by choosing plan A rather than the plan B.

Hence, there is no Nash equilibrium in this game matrix

2. How do you compare the demand faced by a tomato ketchup brand vis-à-vis the
demand faced a steel manufacturer in India? (4 points)

Personally, I feel that the Tomato ketchup brand falls under perfect competition as many firms
are selling identical goods i.e. in this case, tomato ketchup

But if it starts selling other products as well, it will fall under monopolistic competition
If we assume that the tomato ketchup brand sells only ketchup
Then the market structure of ketchup firms will be perfect competition

The firm’s demand curve will be a horizontal line parallel to the X-Axis and is perfectly elastic

There will be no effect on the market price even if the output of the individual firm
changes

ON THE OTHER HAND

A steel manufacturing firm in india will fall under Pure Oligopoly as it has only a few
producers producing exactly the same product.
Steel manufacturing firm will have a kinked demand curve which indicates that the
demand is elastic when the price of steel increases, whereas, demand for steel is
inelastic when the price decreases.

1. Suppose P = 140 - Q is the demand function of the industry which has two firm, A and
B. The total cost of firm A is given by TCA = 20QA , and the total cost of firm B is given
by TCB = 20QB. These firms produce homogenous products and they simultaneously
decide the quantity that they would produce.

a. Find the reaction function of both the firms (3+3=6 points)

P = 140 - Q
Q = Qa + Qb
P = 140 - Qa - Qb

For firm A

Total revenue = TRa

TRa = P.Qa = Qa(140 - Qa - Qb)
= 140Qa- Qa^2 - QaQb
MRa = 140 - 2Qa - Qb
TCa = 20Qa
MCa = 20

MRa = MCa
140 - 2Qa - Qb = 20
Qa= (120- Qb)/2 ------(i)

For firm B

Total revenue = TRb

TRb = P.Qb = Qb(140 - Qa - Qb)
= 140Qb- Qb^2 - QaQb

MRb = 140 - 2Qb - Qa

TCb = 20Qb
MCb = 20

MRb = MCb
140 - 2Qb - Qa = 20
Qb= (120- Qa)/2 ---------- (ii)

b. Draw the reaction functions of firms (2 points)

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Qa = 60 - Qb/2

Qb = 60 - Qa/2

c. Find out the equilibrium output, price and profit produced by each firm (3+3=6 points)

Using equation (i) and (ii)

Qa= (120- Qb)/2 ------(i)
Qb= (120- Qa)/2 ---------- (ii)

2Qa + Qb = 120
Qa + 2Qb = 120

Multiplying equation (ii) by 2 and subtract by (i)

2Qa + Qb = 120
-2Qa - 4Qb = 240
-3Qb = -120
Qb = 40
Qa = 40

P = 140 - Qa - Qb
P = 140 - 80
P = 60

Profit of firm A

piA = TRa - TCa

=40* ( 140 - 80 ) - 40*20
=2400 - 800 = 1600

piB = TRa - TCa

=40* ( 140 - 80 ) - 40*20
=2400 - 800 = 1600

piA = 1600
pib = 1600
Both the firms earn a profit of 1600

d. Find out the outcome if the firms form a cartel (3 points)

If Both the firms agree to form a cartel, they would want to set the output at a level that
maximizes industry profits.

So if the Industry demand is P = 140 - Q

Industry revenue would be

TR= P.Q = (140-Q)Q = 140 Q - Q^2

Therefore,
MR = dTR/dQ =140- 2Q

MC = 20
Derived in previous part

MR = MC

140- 2Q = 20

2Q = 120
Q* = 60
Substituting value of Q* in demand equation

P* = 140 - Q* = 140 - 60 = 80.

piA* = P* Qa* - 20 Qa* = 80*30 - 20*30 = 1,800 ,

piB* = P* Qb*- 20 Qb* = 80*30 - 20*30 = 1,800.

Both the firms earn a profit of 1800 if they form a cartel

e. Compare the outcome in c and d. Which of these two outcomes is relatively better from
the point of view of the society? (2 points)

Firms colluding means anti-competitive behaviour among the firms

Society would prefer a market structure where the firms compete with each other because this
competition would cause fluctuation in prices which would in turn benefit the society. (as society
wants goods at a lower price)

So, from the point of view of the society, The case where the firms perform individually ( no
cartel ) is a relatively better option . Hence c is a better option
3. Suppose an investment of $3,000 gives you the following cash flows: Year 1: $1100
Year 2: $1210 Year 3: $2662 Is it work making this investment if the rate of discount is
10% per annum? (4 points)

After a discount of 10% during the first year

The return would be
Year 1 1100/1.1 = 1000

After a discount of 10% during the first year

The return would be
Year 2 1210/1.21 = 1000

After a discount of 10% during the first year

The return would be
Year 3 2662/1.331 = 2000

The total return would be the sum of returns after discount during 3 years.
Hence,

Return = 4000$

Since the return is greater than investment

We should go for it as we are earning a profit of $1000