7. Use the information in the following table, which summarizes the payoffs (i.e., profit) to two firms that must decide between an average-quality and a high quality product, to answer the questions that follow:
Firm 2 Average Quality High Quality
Firm 1 Average Quality 600, 600 400, 1100
High Quality 1100, 400 900, 900
Firm 2
|
Firm 1
|
|
Average Quality
|
High Quality
|
Average Quality
|
600
600
|
1100
400
|
High Quality
|
400
1100
|
900
900
|
a. What is each player's dominant strategy? Explain your reasoning.
If Firm 1 chooses High Quality and Firm 2 chooses Average Quality then Firm 1 will have the dominant strategy because the outcome will result in the highest payoff no matter what action or choice Firm 2 make.
b. Referring to the table above, is this an example of a prisoner's dilemma game? Why or why not?
c. Is there a Nash equilibrium? If so, what is it?
8. Commercial Recording, Inc., is a manufacturer and distributor of reel-to-reel recording decks for commercial recording studios. Revenue and cost relations are:
TR = $3,000Q - $0.5Q2
MR = ?TR/?Q = $3,000 - $1Q
TC = $100,000 + $1,500Q + $0.1Q2
MC = ?TC/?Q = $1,500 + $0.2Q
- Calculate output, marginal cost, average cost, price, and profit at the average cost-minimizing activity level.