Problem Set 5 ECON 625

29 Jul Problem Set 5 ECON 625

1)            Questions 1 through 3 refer to the scenario that follows. An amusement park, whose customer set is made up of two markets, adult and children, has developed demand schedules as follows:

 

The marginal operating cost of each unit of quantity is $5. (Hint: Because marginal cost is a constant, so is average variable cost. Ignore fixed cost.) The owners of the amusement park want to maximize profits.

 

Calculate the price, quantity, and profit for each segment if the amusement park charges a different price in each market. (Hint: calculate profit at each price in the adult market, then in the child market, and choose profit maximizing in each. Using a spreadsheet would make this task manageable.)

Adult market price (in dollars): [a]

Adult market quantity: [b]

Adult market profit (in dollars): [c]

Child market price (in dollars): [d]

Child market quantity: [e]

Child market profit (in dollars): [f]

Total profit (adult + child, in dollars): [g]

 

2)            Calculate the price, quantity, and profit if the amusement park charges the same price in the two markets combined. (Hint: Add adult and child quantities together, and treat this total and the entire market quantity at each price.)

Market price (in dollars): [a]

Quantity (child + adult at this price): [b]

Profit: [c]

 

 

3)            Is profit higher, lower, or the same when the market is split with different prices for adults and for children?

Higher profit with split pricing

Lower profit with split pricing

Same profit with split pricing

Cannot determine with the information available

 

4)            Questions 4 through 8 refer to the information that follows. Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sunday or whether it will close on that day. Monthly payoffs for each strategy pair are as shown in the table below.

 

Which firm is the most profitable in this market?

Gray (Profit is highest in every situation.)

White

Neither – they are equally profitable

Neither – there is no profit made by either firm

 

5)            What is White’s dominant strategy?

Open Sundays

Closed Sundays

There is no dominant strategy

 

6)            What is Gray’s dominant strategy?

Open Sundays

Closed Sundays

There is no dominant strategy

 

7)            What will be the likely equilibrium outcome, assuming no additional information is available to either firm?

Both open Sundays

Both closed Sundays

**White open Sundays, Gray closed Sundays

White closed Sundays, Gray closed Sundays

 

8)            Is the position identified in question 7 the best possible outcome for both firms?

 

Yes, the position identified in the previous question is the best outcome for both.

No, it would be mutually advantageous to cooperate and choose a different outcome.

Gray could do better, but White is already in the best position and would therefore need an incentive to cooperate.

 

White could do better, but Gray is already in the best position and would therefore need an incentive to cooperate.