Review final Môn Kinh tế vi mô | Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

lOMoAR cPSD| 58605085
Introduction to Microeconomics (BA117IU) Final Review Quoc Thai Le, Ph.D.1
School of Economics, Finance and Accounting International University
Vietnam National University Ho Chi Minh City Summer 2024 References
Mankiw, N. G. (2024). Principles of Economics, 10th Edition. Boston, MA: Cengage. Notes
This review should serve as a revision guide only. Students must study everything including but
not limited to slides, textbooks, readings, etc.
1 Address: Room O1.305, School of Economics, Finance and Accounting, International University, Vietnam
National University Ho Chi Minh City, Ho Chi Minh City, Vietnam. Email: lqthai@hcmiu.edu.vn. lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024 1 Consumer Choice
Question 1: A consumer has an income of 3,000 €. Wine costs 3 € per glass, and cheese costs 6 € per pound.
• Draw the consumer’s budget constraint with wine on the vertical axis. What is the slope of the budget constraint?
• Draw a consumer’s indifference curves for wine and cheese. Describe and explain the
four properties of these indifference curves.
• Pick a point on an indifference curve for wine and cheese, and show the marginal rate
of substitution. What does the marginal rate of substitution tell us?
• Show the optimal consumption choice. What is the marginal rate of substitution at the optimum?
• The consumer gets a raise, so his/her income increases from 3,000 € to 4,000 €.
Show what happens if both wine and cheese are normal goods.
• The consumer gets a raise, so his/her income increases from 3,000 € to 4,000 €.
Show what happens if cheese is an inferior good.
• The price of cheese rises from 6 € to 10 € per pound, while the price of wine remains 3
€ per glass. For a consumer with a constant income of 3,000 €, show what happens to
the consumption of wine and cheese. Decompose the change into income and substitution effects.
• Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain.
Question 2: Maya divides her income between coffee and croissants (both of which are
normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.
• Show the effect of the frost on Maya’s budget constraint.
• Show the effect of the frost on Maya’s optimal consumption bundle assuming that the
substitution effect outweighs the income effect for croissants.
• Show the effect of the frost on Maya’s optimal consumption bundle assuming that the
income effect outweighs the substitution effect for croissants.
Question 3: You consume only soda and pizza. One day, the price of soda goes up, the price
of pizza goes down, and you are just as happy as you were before the price changes.
• Illustrate this situation on a graph.
• How does your consumption of the two goods change? How does your response depend
on income and substitution effects? lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
• Can you afford the bundle of soda and pizza you have consumed before the prices change?
Question 4: Henry consumes only cheese and crackers.
• Could cheese and crackers both be inferior goods for Henry? Explain.
• Suppose that cheese is a normal good for Henry while crackers are an inferior good. If
the price of cheese falls, what happens to Henry’s consumption of crackers? What
happens to his consumption of cheese? Explain.
Question 5: Regina has two options for meals: eating spaghetti at the dining hall for 6 € per
meal, or eating a kebab for 1.50 € per meal. Her weekly food budget is 60 €.
• Draw the budget constraint showing the trade-off between spaghetti and kebab.
Assuming that she spends equal amounts on both goods, draw an indifference curve
showing the optimum choice. Label the optimum as point A.
• Suppose the price of a kebab now rises to 2 €. Show graphically the consequences of
this change in price. Assume that Regina now spends only 30 percent of her income on
spaghetti. Label the new optimum as point B.
• What happened to the quantity of kebab consumed as a result of this price change?
What does this result say about the income and substitution effects? Explain.
• Use points A and B to draw a demand curve for kebab. What is this type of good called?
Question 6: Consider your decision about how many hours to work.
• Draw your budget constraint assuming that you pay no taxes on your income. On the
same diagram, draw another budget constraint assuming that you pay a 15 percent income tax.
• Show how the tax might lead you to work more hours, fewer hours, or the same number of hours. Explain.
Question 7: Zelena is available for 100 hours per week. Using one diagram, show Zelena’s
budget constraints if she earns 12 dollars per hour, 16 dollars per hour, and 20 dollars per hour.
Now draw indifference curves such that Zelena’s labour supply curve is upward-sloping when
the wage is between 12 and 16 dollars per hour and backward-sloping when the wage is
between 16 and 20 dollars per hour.
Question 8: Draw the indifference curve for someone deciding how to allocate time between
work and leisure. Suppose the wage increases. Is it possible that the person’s consumption
would fall? Is this plausible? Discuss.
Question 9: Janet knows that she will ultimately face retirement. Assume that Janet will
experience two periods in her life, one in which she works and earns income, and one in
which she is retired and earns no income. Janet can earn 250,000 dollars during her work lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
period and nothing in her retirement period. She must both save and consume in her work
period and can earn 10% interest on her savings.
• Use a graph to demonstrate Janet’s budget constraint.
• Janet reaches an optimal level of consumption in the work period equal to 150,000
dollars. What is the corresponding optimal level of consumption in her retirement period?
• Now, demonstrate how Janet will be affected by an increase in the interest rate on
savings to 15%. Discuss the role of income and substitution effects in determining
whether Janet will increase/decrease her savings in the work period.
Question 10: Use a diagram to demonstrate circumstances under which a consumer is
indifferent between an in-kind transfer and a cash transfer (both are of equal dollar values). If
a cash transfer is always at least as good as an in-kind transfer, what do you think are the
reasons for maintaining programs which rely on in-kind transfers? Explain your answer.
2 Firms and Market Structures
Question 1: Does simply counting the number of firms in a market tell us whether the market is competitive?
Question 2: The city government is considering two tax proposals: either a lump-sum tax of
300 dollars on each producer of hamburgers or a tax of 1 dollar per burger, paid by all producers of hamburgers.
• Which of the following curves—average fixed cost, average variable cost, average total
cost, and marginal cost—would shift as a result of the lump-sum tax? Why?
Show this in a graph. Label the graph as precisely as possible.
• Which of these same four curves would shift as a result of the per-burger tax? Why?
Show this in a new graph. Label the graph as precisely as possible.
Question 3: A profit-maximizing firm in perfect competition is currently producing 100 units
of output. It has average revenues of $10, average total costs of $8, and fixed costs of $200. • What are its profits?
• What are its marginal costs?
• What are its average variable costs?
• Is the efficient scale of the firm more than, less than, or exactly 100 units?
Question 4: Suppose the book-printing market is a perfectly competitive one, beginning with a long-run equilibrium. lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
• Draw a diagram showing the average total costs, marginal costs, marginal revenues, and
the supply curve of a typical firm in the market.
• Hi-Tech Printing Company Ltd. invents a new process that sharply reduces the cost of
printing books. What happens to Hi-Tech’s profits and to the price of books in the short
run when Hi-Tech’s patent prevents other firms from using the new technology?
• What happens in the long run when the patent expires and other firms are free to use the technology?
Question 5: The market for fertilizer is a perfectly competitive one. Firms in the market are
producing output but are currently incurring economic losses.
• How does the price of fertilizer compare to the average total costs, the average variable
costs, and the marginal costs of producing fertilizer?
• Draw two graphs, side by side, illustrating the present situation for a typical firm and for the market.
• Assuming there is no change in either demand or the firms’ cost curves, explain what
will happen in the long run to the price of fertilizer, marginal costs, average total costs,
the quantity supplied by each firm, and the total quantity supplied to the market. 1 2
Question 6: A perfectly competitive market has 9 firms, each of which has TC = 50+ q 2
in dollars, facing the market demand QD = 120 − P
• What is each firm’s fixed costs? What is its variable costs? Give the equation for average total costs.
• At what quantity is the average-total-cost curve at its minimum? What is marginal costs
and average total costs at such a quantity?
• Give the equation for each firm’s supply curve.
• Give the equation for the market supply curve for the short run in which the number of firms is fixed.
• What is the equilibrium price and quantity for this market in the short run?
• In the short-run equilibrium, how much does each firm produce? Calculate each firm’s
profits/losses. Do firms have an incentive to enter/exit?
• In the long run with free entry/exit, what is the equilibrium price and quantity in this market?
• In the long-run equilibrium, how much does each firm produce? How many firms are in the market? 10
Question 7: A perfectly competitive firm has ATC =
+ 50 + q in euros, facing the lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024 q
market demand QD = 50 − P
• Find the level of output needed to maximise the firm’s profits.
• The government imposes a per-unit tax of t euros. If the firm adds the tax to its costs
and then continues to maximise profits, show that the price of the good/service
increases by two-fifths of the tax, irrespective of the value of t.
Question 8: Explain why a monopolist will never produce a quantity at which the demand curve is inelastic.
Question 9: Draw the demand, marginal-revenue, average-total-cost, and marginal-cost curves for a monopolist.
• Show the profit-maximizing level of output, the profit-maximizing price, and the amount of profits.
• Show the level of output that maximizes total surplus.
• Show the deadweight loss from the monopoly.
Question 10: Give three examples of price discrimination. In each case, explain why the
monopolist chooses to follow such a business strategy.
Question 11: Are there any problems when regulators insist that a natural monopolist must
set a price equal to marginal cost?
Question 12: Bloomsbury is a profit-maximizing publisher, having a monopoly power in
exclusively publishing the series of Harry Potter written by J. K. Rowling (the author), facing
the market demand QD = 1,000,000 − 90,000P. While the author is paid $2 million to write the
book series, the marginal cost of publishing the series is at a constant level of $10 per book.
• Compute total revenues, total costs, and profits at each quantity. What quantity would
Bloomsbury choose? What price would it charge?
• Compute marginal revenues. How does marginal revenues compare to the price? Explain.
• Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do
the marginal-revenue and marginal-cost curves cross? What does this signify?
• In the graph, shade the deadweight loss. Explain in words what this means.
• If the author is paid $3 million instead of $2 million to write the book, how would the
publisher’s decision change regarding what price to charge? Explain.
• Suppose the publisher is not profit-maximizing but is instead concerned with maximizing
economic efficiency. What price would it charge for a book? How much profits would it
make at such an efficiency-maximizing price? lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
Question 13: Taylor Swift has just finished recording her latest CD. Her record company’s
marketing department determines that the market demand for the CD is QD = 130 − 5P.
The company can produce the CD with only a variable cost of $5 per CD.
• What quantity of CDs would maximize profit? What would the price be? What would the profits be?
• If you were Swift’s agent, what recording fee would you advise her to demand from the record company? Why?
Question 14: A company is considering building a bridge across a river. The bridge would cost
$2 million to build and nothing to maintain. The company’s anticipated demand over the
lifetime of the bridge is QD = 800 − 100P where QD is the number of crossings (in thousands)
• If the company were to build the bridge, what would be its profit-maximizing price?
Would that level of output be efficient? Why or why not?
• If the company is interested in maximizing profit, should it build the bridge? What would be its profit or loss?
• If the government were to build the bridge, what price should it charge?
• Should the government build the bridge? Explain.
Question 15: You live in a town with 300 adults and 200 children, and you are thinking about
putting on a play to entertain your neighbours and make some money. A play has a fixed cost
of $2,000, but selling an extra ticket has zero marginal cost. The demand curves 0 if P > 5
for two types of your customers are QadultsD = 300 − 30P and QchildrenD = 100 if P = 5 200 if P < 5
• To maximize profits, what price would you charge for an adult ticket? For a child’s ticket? How much profits do you make?
• The city council passes a law prohibiting you from charging different prices to different
customers. What price do you set for a ticket now? How much profits do you make?
• Who is worse off because of the law prohibiting price discrimination? Who is better off?
Quantify the changes in welfare.
• If the fixed cost of the play were $2,500 rather than $2,000, how would things change?
Question 15: The residents of Hanoi all love Science, and the city leader proposes building an
Science museum, the only one in Vietnam. The museum has a fixed cost of $2,400,000 and no lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
variable costs. There are 100,000 residents in Hanoi, and each has the same demand for
museum visits: QD = 10 − P, where P is the price of admission.
• Graph the museum’s average-total-cost curve and its marginal-cost curve.
• The city leader proposes financing the museum with a lump-sum tax of $24 and then
opening the museum to the public for free. How many times would each person visit?
Calculate the benefit each person would get from the museum, measured as consumer surplus minus the new tax.
• The mayor’s anti-tax opponent says the museum should finance itself by charging an
admission fee. What is the lowest price the museum can charge without incurring losses?
• At the break-even price, calculate each resident’s consumer surplus. Compared with the
city leader’s plan, who is better off with this admission fee, and who is worse off? Explain.
• What real-world considerations absent in the problem above might justify an admission fee?
Question 16: Rumpelstiltskin owns the only well in Storybrooke that produces clean drinking
water. He faces the following demand and marginal-cost curves: QD = 70 − P and MC = 10 + Q.
• Assuming that Rumpelstiltskin maximizes profits, what quantity does he produce? What price does he charge?
• Storybrooke’s Mayor Regina, concerned about water consumers, is considering a price
ceiling 10 percent below the monopoly price (currently charged by Rumpelstiltskin).
What quantity would be demanded at the imposed price? Would the profitmaximizing
Rumpelstiltskin continue to produce the pre-price-ceiling-imposition amount? Explain.
• Zelena (Regina’s sworn enemy) says that a price ceiling is a bad idea since price ceilings
cause shortages. Is Zelena right in this case? How much is the shortage would the price ceiling create? Explain.
• Henry (Regina’s best friend), who is even more concerned about consumers, suggests a
price ceiling 50 percent below the monopoly price. What quantity would be demanded
at this price? How much would Rumpelstiltskin produce? In this case, is Zelena right?
What size shortage would the price ceiling create?
Question 17: Based on a recent market research, Warner Bros. Pictures obtains the following
information about the demand and marginal production costs of its to-beexclusively-released
Joker movie: QD = 100 −
P and MC = 100 + 10Q where Q indicates the number of tickets sold
and P is the price in dollars.
• Find the price and quantity that maximize the company’s profits.
• Find the price and quantity that would maximize social welfare. lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
• Calculate the deadweight loss from monopoly.
• Suppose, in addition to the costs above, the director of the movie has to be paid. The
company is considering four options: (i) a flat fee of 2,000 dollars, (ii) 50 percent of the
profits, (iii) 150 dollars per ticket sold, and (iv) 50 percent of the revenues. For each
option, calculate the profit-maximizing price and quantity. Which, if any, of the
compensation schemes would alter the deadweight loss from monopoly? Explain.
Question 18: Granny’s is a monopolist providing hospitality services in Storybrooke. D − 1 2 + 10Q in
The market demand curve is Q = 100
P, and its total costs are TC = Q 2 euros.
• What is the profit maximizing price and quantity?
• Calculate the deadweight loss due to monopoly.
• Suppose that the government imposes a tax of 10 euros on every service supplied, and
Granny’s then adds the tax to its total costs. What is the new profit maximizing price and quantity?
Question 19: As all firms are assumed to pursue profit-maximization, the profitmaximization
problem therefore implies that firms need to identify the (P;Q) combination that maximizes their profits.
• Show that MR = MC is a solution to a firm’s profit maximization problem.
• Generally, a firm can use the MR = MC rule to identify the (P;Q) combination.
However, in the case of incomplete information about a firm’s demand curve, the MR =
MC approach can be unfeasible. In practice, firms have only a limited knowledge of their
demand as well as (marginal) revenue curves. Therefore, it is difficult to apply the MR =
MC rule to determine both the optimal level of production and the price per unit. In
addition, although linear demand curves are a mathematically convenient tool, demand
curves will, in practice, take many different shapes, sometimes non-linear. Firms
therefore in practice tend to turn to another approach, using the price elasticity of
demand (ε). In particular, a firm given that MC is known can choose a profit-maximizing
price (instead of a profit-maximizing output), taking into account the price elasticity of
demand, and then let the market determine how much quantity to be sold. Show that
P 1 + = MC is another solution to a firm’s profit maximization problem.
– Show that MR = P 1 +
– Show that in monopoly when the firm knows its MC, the monopolist can set a lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024 MC
profit-maximizing price as P =
1 , letting the market determine how much 1 + ε quantity to be sold.
Question 20: A profit-maximizing monopolist, having TC = 50 + Q, is considering the possibility
of charging different prices in its domestic and foreign markets, where the demand curves are
given as QdomesticD = 3 − Pdomestic and QforeignD = 4 − 2Pforeign.
• Determine the prices that the monopolist should charge: (i) with price discrimination,
and (ii) without price discrimination.
• Compare its profits between the two cases.
Question 21: Does a monopolistically competitive firm produce too little/much output as
compared to the most efficient level? What practical considerations make it difficult for
policymakers to solve this problem?
Question 22: How might advertising reduce economic well-being? How might advertising
increase economic well-being? How might advertising with no apparent informational content
still convey information to consumers?
Question 23: Explain two benefits that might arise from the existence of brand names.
Question 24: You are hired as a consultant to a monopolistically competitive firm. The firm
reports the following information about its price, marginal costs, and average total costs. Can
the firm possibly be maximizing profit? If not, what should it do to increase profits? If the firm
is maximizing profits, is the market in a long-run equilibrium? If not, what will happen to restore long-run equilibrium?
• P < MC, P < ATC
• P < MC, P = ATC
• P < MC, P > ATC
• P = MC, P < ATC
• P = MC, P = ATC
• P = MC, P > ATC
• P > MC, P < ATC
• P > MC, P = ATC
• P > MC, P > ATC
Question 25: Unilever is one of many firms in the market for FMCG products, which is in a long-run equilibrium. lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
• Draw a diagram showing Unilever’s demand curve, marginal-revenue curve,
averagetotal-cost curve, and marginal-cost curve. Label Unilever’s profit-maximizing output and price.
• What is Unilever’s profits? Explain.
• On the diagram, show the consumer surplus derived from the purchase of Unilever’s
products. Also show the deadweight loss relative to the efficient outcome.
• If the government forces Unilever to produce the efficient level of output, what would
happen to the firm? What would happen to Unilever’s customers?
Question 26: Consider a monopolistically competitive market with n firms. Each firm’s D 100 business
opportunities are described by the following two equations: Q = − P and n 50 ATC = + Q Q
• How does n affect each firm’s demand curve? Why?
• How many units does each firm produce?
• What price does each firm charge?
• How much profits does each firm make?
• In the long run, how many firms will exist in the market?
Question 27: The market for laptops in Vietnam is monopolistically competitive and currently
in a long-run equilibrium. One day, VUSTA (the Vietnam Union of Science and
Technology Associations) discovers that all brands of laptops in Vietnam are identical.
Thereafter, the market becomes perfectly competitive and again reaches its long-run
equilibrium. Using an appropriate diagram, explain whether each of the following variables
increases, decreases, or stays the same for a typical firm in the market. • price • quantity • ATC • MC • profits
Question 28: Adidas AG is one of many firms in the market for sport shoes.
• Assume that Adidas is currently earning short-run economic profits. Graphically show
Adidas’s profit-maximizing output and price, as well as the area representing profits.
• What happens to Adidas’s price, output, and profits in the long run? Explain the change
in words, and show it graphically.
• Suppose that over time consumers become more focused on stylistic differences among
sport shoe brands. How would such a change in consumers’ attitudes affect each firm’s lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
price elasticity of demand? In the long run, how will such a change in demand affect
Adidas’s price, output, and profits?
• At the post-change profit-maximizing price, is Adidas’s demand curve elastic/inelastic? Explain.
Question 29: With the growth of the Internet, there are many online retailers and many buyers who shop online.
• Why, given the growth of the Internet, would you expect to find that different firms
would charge very similar prices for the same good/service?
• Despite the logic of the first part of this question, several recent studies have found that
different online retailers often charge quite different prices. How might you explain this result?
• Monopolistically competitive firms earn zero economic profit in the long run as do
perfectly competitive firms. Does this mean that total surplus is maximized in a
monopolistically competitive market?
Question 30: Under what situation would an oligopoly behave like perfect competition and
under what situation would it behave like a monopoly?
Question 31: The world market demand for diamonds is QD = 13 − P (in thousands). Suppose
that the marginal cost of diamond production is constant at MC = 1 per diamond
• If there are many suppliers of diamonds, what would be the price and quantity?
• If there are only one supplier of diamonds, what would be the price and quantity?
• A large share of the world supply of diamonds comes from two countries: Russia and
South Africa. If Russia and South Africa formed a cartel, what would be the price and
quantity? If the countries split the market evenly, what would be South Africa’s
production and profits? What would happen to South Africa’s profit if it increases its
production by 1,000 while Russia stuck to the cartel agreement?
• Do you think that the cartel agreement between Russia and South Africa is likely to be successful?
Question 32: A market, comprised of 4 firms, has an demand curve QD = 50 − P. Each firm has
a constant marginal cost of MC = 20. If the firms form a profit-maximizing cartel, agreeing to
operate subject to the constraint that each firm will produce the same output level, how much does each firm produce? lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024 3 Game Theory
Question 1: Give three examples in addition to oligopoly that can be explained by the logics of the prisoners’ dilemma.
Question 2: Economic agents (for example, consumers/firms) often do things that at first
glance seem to be inconsistent with their self-interest. For instance, people tip at restaurants
when they are on vacation, even if they have no intention of returning to the same place;
some firms install costly pollution abatement equipment voluntarily; etc. How can these
deviations from the Nash’s predictions be explained?
Question 3: You and Gabriel, a classmate of yours, are assigned a project on which you will
receive one combined grade. You each want to receive a good grade, but you also want to
avoid hard work. If both of you work hard, you both get an A, which gives each of you 40
units of happiness. If only one of you works hard, you both get a B, which gives each of you
30 units of happiness. If neither of you works hard, you both get a D, which gives each of you
10 units of happiness. Working hard costs 25 units of happiness. • Draw the payoff matrix.
• What is the likely outcome? Explain.
• If you get Gabriel as your partner on a series of projects throughout the year rather than
only once, how might the predicted outcome change?
• Leo, another classmate of yours, cares more about good grades: He gets 50 units of
happiness for a B and 80 units of happiness for an A. If Leo is your partner (while your
preferences remain the same), what is the likely outcome (both in a one-shot situation
and in a repeated situation)? Which of the two classmates would you prefer as a
partner? Would Leo also want you as a partner?
Question 4: Consider the trade war between the United States of America and China
• What is the dominant strategy for the United States? For China? Explain.
• Define a Nash’s equilibrium. What is the Nash’s equilibrium for trade policies between
the United States of America and China?
• In 2018–2019, the two countries have mutually escalated tariffs on billions of trade
flows, upending a long effort to reduce global trade barriers having lasted for decades.
The war has been a major departure from a long-run trend towards tariff liberalization
across the globe. Do the perceived payoffs shown here justify the outcomes of the war?
• Given the four possible outcomes: What do you think is the role of (mutual) trade
liberalization on a nation’s welfare? Do you think that the four possible outcomes make
sense according to the contemporary literature on International Trade? lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024 the U.S. Low tariffs High tariffs Low tariffs (25;25) (10;30) China High tariffs (30;10) (20;20)
Notes: The Table illustrates the trade war game where the
(China’s;the U.S.’s) payoffs (anticipated by the leaders of
the two countries) are expressed in terms of monetary/welfare gains.
Question 5: FPT and Viettel are the only two firms in a specific high-tech industry in Vietnam.
They face the following payoff matrix as they determine the size of their research budget:
• Does FPT have a dominant strategy? Explain.
• Does Viettel have a dominant strategy? Explain.
• Is there a Nash’s equilibrium for this scenario? Explain. Viettel Large budget Small budget Large budget (30;20) (70;0) FPT Small budget (0;30) (50;40)
Notes: The Table illustrates the research budget game where the
(FPT’s;Viettel’s) payoffs are expressed in terms of monetary gains.
Question 6: Consider the fare war game between the two airline companies. Suppose that
each company can charge either a high price for tickets or a low price. If one company charges
$300, it earns low profits if the other company also charges $300 and high profits if the other
company charges $600. On the other hand, if the company charges $600, it earns little profits
if the other company charges $300 and medium profits if the other company also charges $600. • Draw the payoff matrix.
• What is the Nash equilibrium? Explain.
Question 7: Cotti Coffee is a small coffee company that is considering entering a market
dominated by Highlands Coffee. Each company’s profit depends on both whether Cotti Coffee
enters and whether Highlands Coffee sets a high price or a low price:
• Does either player in the game have a dominant strategy? lOMoAR cPSD| 58605085
Introduction to Microeconomics Summer 2024
• Given one player’s action, what should the other player do? What is the Nash’s
equilibrium? Is there only one?
• Highlands Coffee threatens Cotti Coffee by saying, “If you enter, we’re going to set a low
price, so you’d better stay out.” Do you think Cotti Coffee should believe the threat? Why (not)?
• If the two firms could collude, agreeing on how to split the total profits, what outcome would they pick? Highlands Coffee High price Low price Enter (2;3) Cotti Coffee (−1;1) Not enter (0;7) (0;2)
Notes: The Table illustrates the market entry game where the
(Cotti’s;Highlands’s) payoffs are expressed in terms of monetary gains.
Question 8: Why do CocaCola and Pepsi spend huge amounts on advertising? Do they benefit?
Does the consumer benefit? Explain your answer by constructing a game to illustrate the
choices CocaCola and Pepsi make.
Question 9: Two athletes of equal ability are competing for a prize of $10,000. Each is deciding
whether to take a dangerous performance-enhancing drug or not. If one athlete takes the
drug and the other does not, the one who takes the drug wins the prize. If both or neither
take the drug, they tie and split the prize. Taking the drug imposes health risks that are
equivalent to a loss of x dollars. • Draw the payoff matrix.
• For what x is taking the drug the Nash’s equilibrium?
• Does making the drug safer (that is, lowering x) make the athletes better/worse off? Explain.
Question 10: Both Vinamilk and FrieslandCampina are sharing the Vietnam’s milk market, in
which they currently make $5 millions each. Each needs to determine whether to advertise or
not. For each company, advertisement costs $2 millions, allowing to capture $3 millions from
the competitor provided that the competitor doesn’t advertise. • Draw the payoff matrix.
• Find the Nash’s equilibrium/equilibria. —The End—