PROBLEM SET #3
1.
(25 pts) The United States claims that Canada
subsidizes the production of softwood lumber and that imports of lumber damage
the interests of US producers. The
United States has imposed a high tariff on Canadian imports to counter the subsidy. Canada is thinking of retaliating by refusing
to export water to California. The
following table shows the payoff matrix for the game that Canada and the US are
playing:
a.
What is the USâ dominant strategy?
b.
What is Canadaâs dominant strategy?
c.
What is the outcome of the game? Explain.
d.
Is this game like a Prisonerâs Dilemma game or
different in some crucial way? Explain.
e.
Which country would benefit more from a free
trade agreement (no tariffs allowed)?
2.
(10 pts) Although there is relatively little difference in the cost
of producing hardcover and paperback books, the price of hardcover books is
significantly higher than the price of paperback books. Explain this pricing behavior.
3.
(25 pts) Carla substitutes her income as a
teaching assistant by editing term papers for undergraduates.
There are 8 students per week for who she
might edit, each with a reservation price or willingness to pay as given in the
following table:
Carla is a profit maximizer, and her opportunity cost of her
time to edit each paper is $29.
a.
If Carla had to charge the same price to each
student, how many papers should she edit?
What is her economic profit?
b.
Through experience and repeat business, Carla
knows the willingness to pay of each student.
How many papers will she edit if she could charge a different price to
each student? What will her economic
profit be?
c.
Suppose Carla cannot charge a different price to
each student but instead offers a rebate coupon. She knows from experience and repeat business
that students whose willingness to pay at least $36 or more never mail in
rebate coupons, while those whose willingness to pay is below $36 always do so.
Assuming the same opportunity cost of $29,
what should Carlaâs list (high) price be and what amount should she offer as a
rebate? What will her economic profit
be?
4.
(15 pts)The Dunder-Mifflin
Paper Company has been suffering an even greater spate of shirking by the
accounting staff ever since its employees got access to the Internet on their
desktop computers.
a.
Why did this not
affect the sales staff as much?
b.
How does installing
spyware on computers reduce the shirking? How does it affect the rewards the
company provides to employees for reaching performance measures?
5.
(10 pts) Explain why
automobile manufacturers produce their own engines but purchase mirrors from
independent suppliers
6.
(15 pts) A bank in a medium-sized Midwestern
city, BankMidWest, currently charges $1 per transaction at its ATMs. To determine whether to raise price, the bank
managers experimented with a number of higher prices (in 25 cent increments) at
selected ATMs, with the results shown below.
ATM
Fee
Usage
$2.00
1,000
$1.75
1,500
$1.50
2,000
$1.25
2,500
$1.00
3,000
Assuming that the marginal cost of an ATM
transaction is $0.50, what of the above ATM fees should the bank charge?