HW 4 - Tutorial assignment 4 PDF

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Tutorial assignment 4...

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Industrial Organisation, Homework 4

HOMEWORK QUESTIONS

Name: Student ID: Signature:

Instructions: 1). Show how you arrive your answer in the blank space below for each subquestion. Try your best to clearly explain your answer. 2). This homework will not be marked, but submission is accepted for record purpose before 23:00 on the Sunday when the homework is announced/posted. 3). The questions with bold font (e.g. Problem) are highly suggested questions because they are similar to the in-session test and final exam. The extra problems at the end of this homework sheet provide new exercises from the textbook and will be selectively explained in tutorials. You should make effort to work on all of them before the tutorial if possible. The questions will be discussed selectively in the tutorials.

UNSW School of Economics, Industrial Organisation: homework questions

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Problem 1. Incor is currently the only supplier of widgets and earns monopoly rents of $700k. Enterprise is considering entering the market. It would cost Enterprise $100k to set up a factory. However, Incor has threatened to start a price war if Enterprise enters. Your research shows that if Incor follows though on its threat, Incor would earn only $100k from producing widgets, while Enterprise would earn only $25k (before accounting for building costs). However, if Incor does not start the price war, it would make $300k, while Enterprise would earn $200k. 1. Draw this game in extensive form. Be sure to fully label the game tree.

2. What is the subgame perfect equilibrium outcome?

3. Would you advise Enterprise to build the widget factory?

UNSW School of Economics, Industrial Organisation: homework questions

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Problem 2. Study the lecture note “Detailed Derivation of Sequential Hotelling Model” on Moodle, and use it to guide you through the questions below. Two independent ice cream vendors own stands at either end of a 2 mile long beach. Everyday there are 200 beach-goers who come to the beach and distribute themselves uniformly along the water. Every beach-goer one wants exactly one ice cream during the day, and values the ice cream from both stands at $5. All of the beach-goers would rather be sunbathing or in the water, so they have a disutility to walking on the beach of $1 per mile. Early’s Ice Cream, the firm at location 0, is an early riser and always posts his price first. Cali Creamery, at location 2, is more laid back and posts her price just before the beach opens (the beach requires all prices be posted by the time the beach opens). Both firms have a marginal cost of zero. 1. Each individual is also referenced by a location x on the beach between 0 and 2. What are the utilities of purchasing from Early’s and Cali for the person at location 0.75, given that Early’s names price pe and Cali names price pc ? What are the utilities for each individual as a function of their location on the beach, x?

2. What is the demand for Early’s Ice Cream and Cali Creamery given the firms name prices pe and pc ?

UNSW School of Economics, Industrial Organisation: homework questions

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3. What is Cali Creamery’s best response function when Early’s posts a price of pe ?

4. What is the SPNE outcome for this market? Report prices, quantities, and profits for each firm.

5. Early’s owner feels that her hard work is not paying off, so she hires you as a business consultant. She is annoyed that Cali is always undercutting her price and is considering waiting to post so that Cali will not learn her price before naming her own. (That is, both firms will name their prices at the same time.) She wants you to predict how waiting to post her price will affect her profits. What will Early’s profits be under this new regime? What advice do you give her?

UNSW School of Economics, Industrial Organisation: homework questions

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Extra Textbook Problems in Pepall, Richards, and Norman (at the end of each chapter): Chapter 11 – problems 1, 4 and 6. Note: these problems will not be marked, but will be selectively explained in the tutorial session....