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Problem 9 Hard Difficulty

Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price:
a. Does either player in this game have a dominant strategy?
b. Does your answer to part (a) help you figure out what the other player should do?
c. What is the Nash equilibrium? Is there only one?
d. Big Brew threatens Little Kona by saying, "If you enter, we're going to set a low price, so you had better stay out." Do you think Little Kona should believe the threat? Why or why not?
e. If the two firms could collude and agree on how to split the total profits, what outcome would they
pick?

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Chapter 17

Oligopoly

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question, I you're too cos little cona in big groups and now they have to play this game on this chart. So question a this year player in this game have the dominant strategy. So dominant strategy means that if I play something, no matter what my opponent place, that strategy is the best. So we first look from the perspective of Little Kona. So if Big Brew said high price, is it better for a little Kona to enter or don't enter? If they enter, they can make Ancona makes 2,000,000 and if they do not enter, they make zero. So they would choose to Interpol. Ah, sorry. Unique correct Red age. What? I don't know what's wrong? Two Okay, so they will choose to enter. And if Big Brew said low price, they don't konw ah loses 1,000,000 by entered and then and then makes your profit by not entering so they would choose soon not injure and s o for later. Conan, there is no, um dominance strategy because if it big brute do this, they're going to enter. And then if they do that, they're going to not enter Someone call for a big Brousseau for Big Brute. If little Kona enter the market and then they said High price. They're going to make 3,000,000. If they said low cries, they're going to make 1,000,000. So, um so if they enter, they had better said High Price and Eve Lido Kona do not enter weak brew should also said high price because that it high price earth them 7,000,000 while low price all on Lee here is the 2,000,000. So for big through, there is the best response setting type price is always the best response for Big Brute. One question. Be this your answer to part a help. You figure out what they are clear should do so for so things. Setting high prices always the best response is always the dominant strategy for Big Broom. So little Kona knows that no matter what happens, big broom while choose to set high price. So for little Kona, it is better for them to enter because when they entered, they earn $2,000,000 Well, when they not entered, eight makes your profit. So this is going to be the Nash equilibrium. Yes, there is only one there, she Cooper Okay, so we answer questions, See, we'll question these is that big brute threatens me or nothing that okay, if you enter, we're going to settle low price. So if you choose this this world here, we're going to set no price. And do you think you know, connection believed that threat? Why or why not? They should not believe the threat because one state, because they know that that the threat may fight big brew is not logical. It is not a lying with their interest, because if we're gonna did enter, it is better for big brute to set high price. So in this sense, scenery A. We call that this threat saying that OK, if you enter it, we're going to see signal priced. It is an empty threat because it is never going to happen. Okay, if the truth farms could collude and agree Answer how displayed the total profits. What outcome when they pick. So if we look at this telegraph, we can see that come. This cell here has the highest, some ofthe profits because zero plus 7,000,000. 7,000,000 right, But then our national co Abram here is just two plus three So it's total $5,000,000 which is smaller than seven. So if they conclude they will say that, OK, they don't go now. You just don't enter and then let big brew. So all the, um what coffee here or something? And then they they said high price and they could earn this amount of money and and at the end of the day, they will split the profits so each of them get 3.5 because you and little corner well agree on this agreement because 3.5 discretion and two and then brew will also agree on this This agreement, because 3.5 is also off greater than three. So they're collusion here. Both mace, This collusion makes them both better off. So this is how they Well Ah, this is the outcome. They will pick

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Gregory Mankiw

Principles of Economics

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Principles of Economics

Gregory MankiwPrinciples of Economics

Gregory Mankiw

Principles of Economics