Oligopoly / Game Theory , GDP Two firms, Alphatah and Bogatah, produce video systems. The industry demand

Oligopoly / Game Theory , GDP

Two firms, Alphatah and Bogatah, produce video systems. The industry demand function for video systems is P = 100 – 2 (Q ₁ + Q ₂ ), where Q ₁ is the output for Alphatah andQ ₂ is the output for Bogatah. The total cost functions are TC _a = 50 + 80 Q _a and TC _b = 60 + 90 Q _b , respectively.
1. If each firm sets its output to maximize its profits, assuming the other firm holds its output constant, what is the equilibrium price? Show your work . ( 2 pts)

b. What will be the output for each firm? Show your work . ( 2 pts)
c. What will be profit for each firm? Show your work . ( 2 pts)

2. Suppose AltoCo and InnaCo are considering a merger in the widget industry. Based on the table below calculate the Herfindahl-Hirshman Index before and after AltoCo absorbs InnaCo. ( See p.208, 2 ^nd ed. )

	Pre-merger	Post-merger
	Market Share	Market Share
Gr8Co	18
AltoCo	12
MagnifiCo	10
SupraCo	9
InnaCo	8
TramCo	8
CymCo	6
WidgiCo	4
SloCo	4
TrailCo	3
AbyssCo	3
All others (15)	1 each
Total	100	100

a. HHI (pre-merger) = _______ ( 2 pts)
b. HHI (post-merger) = _______ (2 pts)
c. Is the Justice Dept likely to deny the merger based on the HHI? ( Yes or No? )
Answer: _____ (2 pts)
d. What is the 4-firm concentration ratio before the merger? Answer: ______ (2 pts)
3. Indicate if the following is true (T) or false (F) regarding game theory? ( 7 pts )

____a.	Game theory is an area of economic logic that applies in all four market models.
____b.	Easy entry into a market tends to erode collusive agreements.
____c.	Entry into an oligopoly is less likely if existing firms are carrying excess capacity.
____d.	In the prisoner’s dilemma model the two prisoners are allowed to communicate with one another before making their decision.
____e.	If a firm has a dominant strategy, that strategy will be implemented regardless of the rival’s strategy.
____f.	A Nash equilibrium occurs when each firm adopts the best strategy given the behavior or strategy of rival firms.

____g.	Chess is an example of a sequential game.

4 . The table below shows the payoffs two competing firms, Ackto and Basko, face in the decision to reduce their price or retain their current price.

		Ackto
		Lower Price	Retain Price
Basko	Lower Price	Ackto 70K Basko 80K	Ackto 40K Basko 100K
Basko	Retain Price	Ackto 100K Basko 50K	Ackto 80K Basko 90K

a. What will Ackto’s decision be and why ? ( 3 pts)
b. What will Basko’s decision be and why ? ( 3 pts)
5. You are given the following information on the various sectors of the economy. (numbers in billions)
C = 100 + 0.75Y G = 500 M = 100 + 0.1Y
I = 200 + 0.2Y X = 250