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Unit 8
[Microeconomics]
Unit 8 Assignment: Oligopoly and Monopolistic
Competition and Product Differentiation
Name:
Course Number:
Section Number:
Unit Number:
Date:
-8
-
Problem
Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate
walk-in medical services in the town of Springfield. That is, they operate in a
duopoly. Each doctor can charge either a high price or a low price for a standard
medical visit. The accompanying matrix shows their payoffs, in profits per patient
(in dollars), for any choice that the two doctors can make.
1. Suppose the two doctors play a one-shot game—that is, they interact only once
and never again. What will be the Nash (non-cooperative) equilibrium in this
one-shot game?
Unit 8
[Microeconomics]
2. Now suppose the two doctors play this game twice. Also, suppose each doctor
can play one of two strategies: it can play either “always charge the low price” or
“tit for tat”— that is, it starts off charging the high price in the first period, and
then in the second period it does whatever the other doctor did in the previous
period. Write down the payoffs to Dr. Fine from the following four possibilities:
a. Dr. Fine plays “always charge the low price” when Dr. Feelgood also plays
“always charge the low price.”
FIRST Period
Charges
(high or
low)
Payoffs
SECOND Period
Charges
(high or
low)
Fine
Fine
Feelgood
Feelgood
Payoffs
TOTAL Payoffs
b. Dr. Fine plays “always charge the low price” when Dr. Feelgood plays “tit
for tat.”
FIRST Period
Charges
(high or
low)
Fine
Feelgood
Payoffs
SECOND Period
Charges Payoffs TOTAL Payoffs
(high or
low)
Fine
Feelgood
Unit 8
[Microeconomics]
c. Dr. Fine plays “tit for tat” when Dr. Feelgood plays “always charge the low
price.”
FIRST Period
Charges
(high or
low)
Fine
Feelgood
Payoffs
SECOND Period
Charges Payoffs TOTAL Payoffs
(high or
low)
Fine
Feelgood
d. Dr. Fine plays “tit for tat” when Dr. Feelgood also plays “tit for tat.”
FIRST Period
Charges
(high or
low)
Fine
Feelgood
Payoffs
SECOND Period
Charges Payoffs TOTAL Payoffs
(high or
low)
Fine
Feelgood
3. “In the long run, there is no difference between monopolistic competition and
perfect competition.”
Discuss whether this statement is true, false or ambiguous with respect to each
of the criteria listed under a, b, c, and d. Justify your answers.
a. The price charged to consumers
b. The average total cost of production
c. The efficiency of the market outcome
d. The typical firm’s profit in the long run
--------------------References:
Unit 8
[Microeconomics]
Unit 8 Assignment: Oligopoly and Monopolistic
Competition and Product Differentiation
Name:
Course Number:
Section Number:
Unit Number:
Date:
-8
-
Problem
Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate
walk-in medical services in the town of Springfield. That is, they operate in a
duopoly. Each doctor can charge either a high price or a low price for a standard
medical visit. The accompanying matrix shows their payoffs, in profits per patient
(in dollars), for any choice that the two doctors can make.
1. Suppose the two doctors play a one-shot game—that is, they interact only once
and never again. What will be the Nash (non-cooperative) equilibrium in this
one-shot game?
Unit 8
[Microeconomics]
2. Now suppose the two doctors play this game twice. Also, suppose each doctor
can play one of two strategies: it can play either “always charge the low price” or
“tit for tat”— that is, it starts off charging the high price in the first period, and
then in the second period it does whatever the other doctor did in the previous
period. Write down the payoffs to Dr. Fine from the following four possibilities:
a. Dr. Fine plays “always charge the low price” when Dr. Feelgood also plays
“always charge the low price.”
FIRST Period
Charges
(high or
low)
Payoffs
SECOND Period
Charges
(high or
low)
Fine
Fine
Feelgood
Feelgood
Payoffs
TOTAL Payoffs
b. Dr. Fine plays “always charge the low price” when Dr. Feelgood plays “tit
for tat.”
FIRST Period
Charges
(high or
low)
Fine
Feelgood
Payoffs
SECOND Period
Charges Payoffs TOTAL Payoffs
(high or
low)
Fine
Feelgood
Unit 8
[Microeconomics]
c. Dr. Fine plays “tit for tat” when Dr. Feelgood plays “always charge the low
price.”
FIRST Period
Charges
(high or
low)
Fine
Feelgood
Payoffs
SECOND Period
Charges Payoffs TOTAL Payoffs
(high or
low)
Fine
Feelgood
d. Dr. Fine plays “tit for tat” when Dr. Feelgood also plays “tit for tat.”
FIRST Period
Charges
(high or
low)
Fine
Feelgood
Payoffs
SECOND Period
Charges Payoffs TOTAL Payoffs
(high or
low)
Fine
Feelgood
3. “In the long run, there is no difference between monopolistic competition and
perfect competition.”
Discuss whether this statement is true, false or ambiguous with respect to each
of the criteria listed under a, b, c, and d. Justify your answers.
a. The price charged to consumers
b. The average total cost of production
c. The efficiency of the market outcome
d. The typical firm’s profit in the long run
--------------------References:
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