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##### Washington State ECONS 425 Industrial Organization Final Exam

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Question;EconS 425;Final Exam;1. Consider the following game;about trust that has been played in many experiments. The experimenter starts;by giving player 1 ten dollars and player 2 zero dollars. The experimenter then;asks player 1 how many dollars is he willing to give back to help player 2. If;he chooses to give x dollars back;to the experimenter, then the;experimenter gives player 3 3x dollars. Subsequently, player 2 has the;opportunity to give any or all;(or none) of the money he has received to player 1.;(a) Assuming that the two players;are risk neutral and care only about their own payo? FInd the;subgame perfect equilibrium of;this game. (The subgame perfect equilibrium, by the way, is not;what seems to happen in;experiments. Usually player 1 gives some, but not all of the money back;to the experimenter.);(b) Does the game have a Nash;equilibrium in which the players receive higher payo?s?;(c) Suppose we modiFIed the game;so that after the two stages above player 1 had the chance to;punch player 2. Suppose that this;would reduce player 1?s utility by 1 dollar and reduce player;2?s utility by 5 dollars. Would;this change your answers to parts (a) and (b)? How about if we;instead had the players play the;game shown below after the second stage? Do these predictions;seem reasonable to you.;Player 2;A B;Player 1 A 5,5 -5,-5;B -5,-5 5,5;(d) An alternative explanation;for the experimental results is that the players may be altruistic. Show;that the simplest representation;of altruism ?each player maximizing a weighted sum of his own;dollar payo? and the other;player?s dollar payo? ?cannot account for the experimental regularity except;for one very special (and not compelling) choice of the weights. Can you think;of utility;functions that might be used to;account for the experimental result?;2. Prove the second part of;Proposition 12.1 (page 309) using the same procedure as the one used in the;proof of the FIrst part.;3. A monopoly o?ers a product for;sale. The product costs c = $60 to produce. The product may fail;with probability 0:5, hence it is;fully operative with probability = 0:5.;This probability is public;information in the sense that it;is known to the seller and all buyers. The product can either be fully;functioning or totally defective.;Consumers are willing to pay up to V = $240 for a fully-functioning;product. If the product is found;to be defective, consumers do not gain any utility. Solve the following;problems.;(a) The monopoly provides a;?twice-replacement?warranty. That is, if the original purchase is found;to be defective, the consumer can;have the product replaced free of charge. If the replacement;product is also found to be;defective, it also gets replaced free of charged. However, the monopoly;will not replace the replacement;of the replacement product if it also found to be defective.;Compute monopoly?s proFIt-maximizing;price and the resulting expected proFIt.;(b) Now suppose the monopoly;provides a money-back guarantee (instead of the twice-replacement;warranty). Compute monopoly?s proFIt-maximizing;price and the resulting expected proFIt.;Microsoft and Apple produce;di?erentiated goods, Microsoft Surface (MS) and iPad (iP), respectively.;There are two types of buyers in;the economy, those who are FIrst time buyers (inexperienced consumers) and those;who have purchased the product before (experienced consumers). The group of;inexperienced consumers represents the 45% of the total group of consumers.;Assume that the group of experienced;consumers is divided into two subgroups: those who prefer to purchase MS;over brand iP, and those who prefer iP over MS. Let;4. The inverse market demand;function for MP3 players is given by p = 240 -2Q. Initially, firm A and;firm B produce at equal unit;cost, c0. After investing heavily in R&D, firm A has managed to reduce;its unit production cost to c1 =;$40 0 and FIrm 2;has the same marginal cost than FIrm;1. First, the potential entrant observes FIrm 1?s output level and;then it decides whether or not to;enter. If FIrm 2 enters, both FIrms compete a la Cournot. Find the;range of values of F for which FIrm;1 (incumbent) decides to accommodate entry.;7. Microsoft and Apple produce;di?erentiated goods, Microsoft Surface (MS) and iPad (iP), respectively.;There are two types of buyers in;the economy, those who are FIrst time buyers (inexperienced consumers) and;those who have purchased the product before (experienced consumers). The group;of inexperienced consumers represents the 45% of the total group of consumers.;Assume that the group of experienced consumers is divided into two subgroups;those who prefer to purchase MS over brand iP, and those who prefer iP over MS.;Let B, 0 < B < 1, be the fraction of MS-oriented consumers (among;experienced consumers). Hence, (1-B) is the fraction of iP-oriented consumers;(among experienced consumers). In addition, FIrms must decide between two;advertising methods: Persuasive (P) or Informative advertising (I).;a) Following Assumption 11.1;(page 292), identify the proFIt level for each FIrm and the aggregate;proFIt under all four possible;outcome.;(b) Discuss under which;conditions both FIrms will use informative advertising. Discuss your results.;8. Following Brander and Spencer;1983 and 1985, consider two countries denoted by i = X, Y, each of;which has one FIrm producing a homogeneous;product only for export, to be sold in the international;market. Both FIrms compete a la;Cournot in the international market. The inverse demand function;in the international market is P;= 15 ? 0.5Q. In addition, assume that the preinnovation unit cost;of each FIrm is c = 4. Let ri;denote the amount of R&D sponsored by the government in country i.;Assume that when the government i;undertakes R&D at level ri, the unit production cost for the firm producing;in country I is reduced to c-ri, I = X, Y. Finally, the total cost to;government I of engaging in R&D at level ri, is TC;(a) Identify countries best;response function.;6(b) What is the Nash equilibrium;R&D level for each country? Discuss your results., t

Paper#57271 | Written in 18-Jul-2015

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