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Suppose Air Canada and West Jet are deciding whethe




Instructions;1. This assignment is due (in hardcopy form) by the beginning of your class on the date shown;above. Assignments up to 24 hours late will receive a 25% penalty. Assignments more than 24;hours late will not be accepted. Late assignments can be given to Helen Ho in HA 266 or to Ines;Bilec in the Undergraduate office or can be given to your instructor.;2. Extensions are possible only for genuine emergencies. Permission for the extension must be in;advance (i.e. at least 24 hours before the assignment is due) and must be accompanied by;appropriate documentation. See Ines Belic in the Undergraduate Office.;3. Show your working for all questions. Please be concise with your answers, and clearly identify;the answer to the specific question you are being asked. Please carry 2 non-zero digits to the right;of the decimal for answers that do not work out to whole numbers. Explain your reasoning where;asked to do so.;4. Please use the remaining pages (not this page) as a template. 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(Game Theory I) Suppose Air Canada and West Jet are deciding whether to offer a frequent;flyer program (FFP). The annual profits of the two firms from each combination of strategies they;choose is given in the following payoff matrix. The firms choose simultaneously.;Air Can.;FFP;NO FFP;West Jet;FFP;180, 150;160, 210;NO FFP;200, 75;225, 200;a) Identify any dominant strategies. Determine the Nash equilibrium in this game. (State the;strategies and the payoffs.) Determine the maximin solution. Is this an example of a Prisoner's;Dilemma? In answering this question provide the relevant definitions and explain briefly how they;apply.;3;b) Here is an entry game.;Firm 2;Do Not Enter;Enter;Firm 1;Do Not Enter;0,0;2,0;Enter;0,2;-1,-1;Identity any Nash equilibria in pure strategies. If firm 1 plays a mixed strategy of entering with;90% probability, what is the best response of firm 2? Is this combination of strategies a Nash;equilibrium? Explain briefly. (Hint: when considering whether a proposed solution is a Nash;equilibrium ask whether either firm regrets its choice whether its best response is different from;what it actually chose.);4;2. (Coordination Games). Consider the following network scheduling payoff matrix for Shaw;Cable and Telus.;Shaw;Wednesday;Thursday;Telus;Wednesday;2, 2;12, 12;Thursday;10, 10;2, 2;a) Identify any Nash equilibria in this game. Explain briefly.;b) Would pre-play communication or application of the Pareto criterion be helpful in this game?;Explain briefly.;5;3. (Repeated Games) Apple and Microsoft must decide on a pricing strategy for their tablet;devices, the iPad and the Surface. Their respective marketing departments have determined two;potential prices, one high and one low. The payoffs (in millions of dollars) are summarized in the;table below.;Microsoft Surface;Low Price;High Price;Low Price;25, 20;60, 15;High Price;20, 50;55, 45;Apple iPad;a) What is the Nash equilibrium in the one-shot (static) game? Now suppose that the companies;repeat this game every year with new versions of the tablets. Describe two different Nash;equilibria of this infinitely repeated game and explain why each is an equilibrium. Your description;of each equilibrium should be a pair of strategies (one for each firm), and the equilibrium payoffs;for each firm per round.;6;b) A start-up competitor has developed a new technology that will make current tablet computers;obsolete. There is no uncertainty about the success of the new venture, but it will take an;additional 3 years to manufacture the required components. The founder of the start-up makes a;public announcement that the new device will go on sale in three years. Do we expect Apple and;Microsoft to make the most of the next three years by colluding on high prices? Explain your;answer using appropriate terminology.;7;4. (Stackelberg Oligopoly) Consider the competition between Honda and Toyota in the compact;car market. Each firm must commit to a production level at the beginning of the year. The payoffs;for three possible outputs of each firm (in millions of dollars) are given in the table below.;Suppose Honda preempts Toyota by finishing plans on its latest upgrade early, and therefore;makes a public commitment on quantity before Toyota.;Toyota Corolla;High Quantity;Medium;Low Quantity;Quantity;High Quantity;10, 10;30, 20;50, 25;Medium;Quantity;20, 30;40, 40;60, 30;Low Quantity;25, 50;30, 60;50, 50;Honda Civic;a) Draw the relevant extensive form representation (game tree) for this strategic interaction. What;is the sub-game perfect Nash Equilibrium?;8;b) Suppose Honda must spend an additional 15 million dollars to be in the position to announce;first, and otherwise the two firms announce simultaneously. Is it profitable for Honda to expedite;planning? Now suppose that Toyota goes first unless Honda spends the $15 million to expedite;planning, in which case Honda goes first. Would the 15 million dollar investment be worthwhile in;this case? Explain.;9;5. Sequential Games;a) Consider the following game tree describing strategic interaction between an incumbent;monopolist and a potential rival.;For what range of values of X and Y will the incumbent deter entry by investing? Show;your working.;b) A mining company is considering starting operations in a foreign country known to be;rich in mineral deposits but with an unreliable government. Extracting the minerals will be;very profitable, but requires extensive and costly digging before anything can be extracted;from the ground. Explain briefly using appropriate terminology why the company might be;hesitant to start work on this potentially profitable project. (No diagram is needed.);10;6. Behavioral Economics;a. Consider a game with 10 players. Each person submits an integer between 0 and 100. The;winner of the game is the person who submits a number closest to 60% of the average number;submitted. The winner gets a prize of $1000 and no one else gets anything. If two or more people;tie for the win they share the prize equally. Assuming that all players are fully rational and that;rationality is common knowledge, what is the Nash equilibrium? If you were playing this game;with randomly chosen first year UBC students, would you bid the Nash equilibrium value?;The Nash equilibrium is __________________________________________________________.;We know this is a Nash equilibrium because;If I were trying to win this game I would submit the value _________________________.;I think this offers the best chance of success because;______________________________________.;11;b. State whether prospect theory, the reciprocity norm, or neither can explain the following;phenomena. Circle the correct response and explain briefly.;Framing effects. Prospect Theory or Reciprocity Norm or Neither.;The Certainty Effect. Prospect Theory or Reciprocity Norm or Neither.;Overconfidence. Prospect Theory or Reciprocity Norm or Neither.;Behavior in Ultimatum Games. Prospect Theory or Reciprocity Norm or Neither.;Bounded Rationality. Prospect Theory or Reciprocity Norm or Neither.;12;7. (Uncertainty) A manager must choose one of four advertising strategies, with the following;characteristics. The manager cares only about the expected value and variance of the projects.;Strategy;A;B;C;D;Return with;Bad Luck;2;4;1;2;Probability of;Bad Luck;0.7;0.6;0.2;0.5;Return with;Good Luck;12;9;6;12;Probability of;Good Luck;0.3;0.4;0.8;0.5;a. Put this data into a spreadsheet, add three columns with headings EV, VAR, and SD, and use the;spreadsheet to calculate the expected value, variance, and standard deviation. Paste the resulting;spreadsheet in the space below.;Which strategy would be chosen by a risk preferring manager? a risk neutral manager? a risk;averse manager?;A risk preferring manager would choose _____ because;A risk neutral manager would choose ________ because;For a risk averse manager we can say;13;b. Suppose utility is given by U = Y where Y is the return. For Strategy B what is the expected;utility and what is the risk premium? Draw the associated diagram showing the risk premium. (Do;not worry about making the diagram precise. Just illustrate the general idea, but include the;relevant numbers on the axes.);14;8. (Adverse Selection) Consider the used car example described in Q&A 15.1, except the numbers;are different. Buyers value lemons at $5000 and good used cars at $10,000. The reservation price;of lemon owners is $4000 and the reservation price of owners of good used cars is $7,500. Owners;know the quality of the cars but buyers do not. (Show your working.);a. Suppose that 40% of the used cars are good used cars and 60% are lemons. Describe the;equilibrium.;b. Now suppose that 60% of the cars are good used cars and 40% are lemons. Describe the;equilibrium now.;15;9. (Agency) Priscilla hires Arnie to manage her business, both of them are risk neutral. The;following table shows Priscilla's profits (before paying Arnie) for two different levels of Arnie's;effort and two different market situations. If Arnie provides low effort, his cost of effort is zero;but if he provides high effort his cost is 10. Weak demand and strong demand are equally likely.;(Show your working.);Low Effort;High Effort;Weak Demand;20;40;Strong Demand;40;80;a) If Priscilla offers a profit sharing contract in which Arnie gets 30% of the profits, what effort;level would Arnie provide? Calculate Priscilla's expected net profits (after paying to Arnie) under;this contract.;b) If Priscilla offers a bonus contract in which Arnie gets a base salary of 4 (no matter whether;demand is weak or strong) plus 80% of all profits exceeding 40, what effort level would Arnie;choose now? Which contract (profit sharing or bonus) would Priscilla prefer? Which contract;would Arnie prefer?;16;10. (Economic Research);Holloway, Lee and Shen (2014) study the determinants of cross-border leveraged buyouts.;a) The authors present a stylized model of the global competition among buyout firms.;i) What factors in the model determine the number of acquisitions by buyout firm in each country?;ii) Can you think of any other factors that likely play a role in the real world?;iii) Where do these other factors implicitly enter the equation for the number of completed buyout;deals by each investor in each country?;b) The authors test the predictions of the model using a sample of worldwide buyout deals.;i) Which two countries dominate as home countries for buyout firms in the sample?;ii) How do the authors test the prediction that transaction costs associated with remote ownership;impact the number of deals? How do they measure the theoretical cost mitigation ability?;iii) Are results consistent with the predictions of the model? How can you tell?;17;18Level of Detail: Show all work;Other Requirements: Please complete Question 8ab


Paper#15405 | Written in 18-Jul-2015

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