03 Jun Question ECON 661, Managerial Economics Homework Assignment 5
Question
ECON 661, Managerial Economics
Homework Assignment 5
Due Date: Friday, December 5
Please answer all questions.
1. Suppose Delta Airlines and United Airlines are the only carriers that serve the Miami –Cincinnati market. Ticket sales of both carriers are affected by their advertising decisions.
The resulting increases in sales for the two carriers are given in the following table:
Delta Airlines
United Airlines
Delta Sales
($000’s)
United Sales
($000’s)
Raise Ad Spending
Raise Ad Spending
400
300
Raise Ad Spending
Leave Ad Spending the Same
500
400
Leave Ad Spending the Same
Raise Ad Spending
300
800
Leave Ad Spending the Same
Leave Ad Spending the Same
200
500
Consider that the two companies make their decisions simultaneously,
a. Construct a payoff table (by completing the table below) to show the sales (in dollars) each company would earn in each of the four decision situations (Do it in the manner it is done in the textbook does it). (10 pts)
United’s Choice
Delta’s Choice
Raise Ad Spending
Leave Ad Spending the Same
Raise Ad Spending
Leave Ad Spending the Same
b. Does Delta have a dominated strategy? Why or why not? If it has, identify the strategy. Does United have a dominated strategy? Why or why not? If it has, identify the strategy. Always justify your answer. (15 pts)
c. Does Delta have a dominant strategy? Why or why not? If it has, identify the strategy. Does United have a dominant strategy? Why or why not? If it has, identify the strategy. Always justify your answer. (15 pts)
d. Locate the likely outcome of this advertising decision problem. Justify your answer.
(15 pts)
e. Is the likely outcome a Nash equilibrium? Explain why or why not. (15 pts)
f. Is the likely outcome strategically stable? Explain why or why not. (10 pts)
2. Suppose United chooses and announces its ad expenditure (budget) before Delta does.
a. What is the Nash equilibrium in this game? Explain how you arrived at your answer.
(Constructing a diagram (game tree) that shows the structure and payoffs of the game in answering this question is recommended but not required) (10 pts)
b. Is there a first- mover advantage or first-mover disadvantage in this game? Explain why? (10 pts)
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