EBK PRINCIPLES OF MICROECONOMICS (SECON
2nd Edition
ISBN: 9780393616149
Author: Mateer
Publisher: W.W.NORTON+CO. (CC)
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Chapter 13, Problem 10SP
To determine
Dominance of the market in the long run.
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Suppose there is a remote stretch of highway along which two restaurants, Last Chance Café and Desolate Diner, operate in a duopoly. Neither restaurant invests in keeping up with health code regulations, but regardless they both have customers as they are the only dining options along a 79-mile portion of the road. Both restaurants know that if they clean up and comply with health codes they will attract more customers, but this also means that they will have to pay workers to do the cleaning.
If neither restaurant cleans, each will earn $10,000; alternatively, if they both hire workers to clean, each will earn only $7,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $15,000, and the other restaurant will make only $3,000.
Complete the following payoff matrix using the information just given. (Note: Last Chance Café and Desolate Diner are both profit-maximizing firms.)
Desolate Diner…
Suppose there is a remote stretch of highway along which two restaurants, Last Chance Café and Desolate Diner, operate in a duopoly. Neither
restaurant invests in keeping up with health code regulations, but regardless they both have customers as they are the only dining options along a 79-
mile portion of the road. Both restaurants know that if they clean up and comply with health codes they will attract more customers, but this also
means that they will have to pay workers to do the cleaning.
If neither restaurant cleans, each will earn $13,000; alternatively, if they both hire workers to clean, each will earn only $10,000. However, if one
cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $17,000, and the other restaurant
will make only $5,000.
Complete the following payoff matrix using the information just given. (Note: Last Chance Café and Desolate Diner are both profit-maximizing firms.)
Last Chance Café
Cleans Up…
Santa Monica’s government has grown tired of the clutter of vehicles caused by the large number of companies and has decided to give licenses to only two companies to operate within city limits. Luckily for you, Whylz was selected as one of the companies along with their competitor SCUTE. The chief economic officer at SCUTE has scheduled a call to discuss raising your prices in tandem. You know that if both Whylz and SCUTE raise their prices together, both companies’ profits will increase. However, you know that if SCUTE back out of the price increase, Whylz profit will decline, while SCUTE’s profits will increase. Similarly, if Whylz refuses to raise prices while SCUTE does, your firm will capture a larger share of the market and increase profits while SCUTE will lose profit. Should Whylz raise its price? Is there a Nash Equilibrium strategy? If so, is the Nash Equilibrium strategy the best outcome for your company? Is it the best outcome for both companies? Explain your answer.…
Chapter 13 Solutions
EBK PRINCIPLES OF MICROECONOMICS (SECON
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