Managerial Economics (Handwriting-5%) 1. (35%) Two firms compete in a market to sell a homogenous produce with inverse demand function P = 400 - 2Q. Each firm produces at a constant marginal cost of $50. Use this to compare the output and profits in settings characterized by Cournot, Stackelberg, Bertrand, and collusive behavior. 2. (15%) Suppose Ann is working on a project with John. Both must decide whether to put into a decent amount of effort into the project. Since Ann is the leader of the project, her contribution determines whether the project will be successful. If she puts into a decent amount of effort, the project will be finished on time and each will enjoy 3 units of benefit. If she decides not do so, the project will not be finished on time, neither one will get benefit. Suppose a decent amount of effort incurs a cost of 1 unit for each person. Please use the normal form represent the situation and identify the Nash Equilibrium if there is any. Would both be happy about the outcome and why? 3. (15%) Coca-cola and PepsiCo are the leading competitors in the market for cola products. In 1960 Coca-Cola introduced Sprite, which today is the worldwide leader in the lemon-lime soft drink market. Prior to 1999, PepsiCo did not have a product that competed directly against Sprite and had to decide whether to introduce such a soft drink. By not introducing a lemon-lime soft drink, PepsiCo would continue to earn a $200 million profit, and Coca-Cola would continue to earn a $300 million profit. Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies could be pursued:(1)PepsiCo could trigger a price war with Coca-cola and both would earn profits of 100 million, or (2)Coca-Cola could consent, then Coca-cola and PepsiCo would earn $275 million and $227 million respectively. Please use the extensive form represent the situation. Would introducing the new soft drink be the most profitable strategy? 1 4. (15%) Explain moral hazard and adverse selection problems. Discuss a few tactics that managers can use to overcome these problems. 5. (15%) Explain first degree price discrimination, twopart pricing and block pricing. (provide graphs for the explanation) 2
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