Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 14, Problem 14.3.3PA
To determine
Whether deterring entry is a good deal or not.
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Economics: Industrial Economics
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Consider the following sequential game between firm 1 and firm 2:
First, firm 1 decides to either adopt an aggressive marketing strategy or not. Second, Firm 2 observes firm 1's decision and then also decides between its own aggressive strategy, a passive strategy or whether to leave the market altogether. The profits (in millions of dollars) of the firms are as follows: If both adopt an aggressive strategy, then firm 1's payoff is $14 and firm 2's is $1. If firm 1 adopts an aggressive strategy and firm 2 does not, then the payoff for firm 1 is $21 and for firm 2 is -$5. If firm 1 does nothing and firm 2 adopts an aggressive strategy, firm 1's payoff is $10 and firm 2's is $9. If both do nothing, then firm 1 makes $20 in profits and firm 2 makes $5. Finally, if firm 2 leaves the market altogether, it makes $0 and firm 1 makes $20 with an aggressive strategy and $24 without one.
1. Using the principle of backward induction, the most…
Use the following information to answer questions 1 to 5.
A firm is deciding whether or not to enter a new market. The decision tree for the firm is provided below.
The prompt below the decision tree explains how the decision tree was created.
Enter
Do Not Enter
Allowed
0.9
Denied
0.1
3
Research
No Research
Good
0.7
Bad
0.3
5
6
Produce
Sell
Produce
Sell
Produce
Sell
8
9
10
High
0.75
Low
0.25
High
0.25
Low
0.75
High
0.6
Low
0.4
Profit (5000s)
1200
-800
-200
1200
-800
-200
1400
-600
0
-100
0
At node 1, the firm must decide whether to enter the new market or not. The cost of attempting to enter
is $100,000. The upper branch from node 2 shows that the firm has a 0.9 probability of being allowed to
enter the market. If the firm is allowed to enter, it will have to pay $1,500,000 to buy the facilities required
to become a part of the market. Node 3 shows that the firm will then consider doing a research study to
forecast demand for their new product prior to beginning production. The cost of…
Musashi owns and operates a hot dog stand in downtown Chicago. In order to operate his hot dog stand, regardless of the number of hot dogs sold,
Musashi must purchase a permit from the local government in Chicago. Musashi's initial profit hill is plotted in green (triangle symbols) on the
following graph.
Suppose the price Musashi must pay for a permit increases by $80 per day.
On the following graph, use the purple diamond symbols to plot Musashi's new profit hill, for 0, 10, 20, 30, 40, 50, 60, and 70 hot dogs, after the
increase in the price of a permit (with all other factors remaining constant).
Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.
TOTAL PROFIT (Dollars per day)
400
350
300
250
200
150
100
50
0
-50
-100
-150
-200
0
A
10
30
40
50
60
QUANTITY (Hot dogs per day)
20
70
Initially, Musashi's profit-maximizing level of output is
level of output is
hot dogs per day.
Initial Profit Hill
80
New…
Chapter 14 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 14 - Prob. 14.1.1RQCh. 14 - Prob. 14.1.2RQCh. 14 - Prob. 14.1.3RQCh. 14 - Prob. 14.1.4PACh. 14 - Prob. 14.1.5PACh. 14 - Prob. 14.1.6PACh. 14 - Prob. 14.1.7PACh. 14 - Prob. 14.1.8PACh. 14 - Prob. 14.1.9PACh. 14 - Prob. 14.1.10PA
Ch. 14 - Prob. 14.2.1RQCh. 14 - Prob. 14.2.2RQCh. 14 - Prob. 14.2.3RQCh. 14 - Prob. 14.2.4RQCh. 14 - Prob. 14.2.5PACh. 14 - Prob. 14.2.6PACh. 14 - Prob. 14.2.7PACh. 14 - Prob. 14.2.8PACh. 14 - Prob. 14.2.9PACh. 14 - Prob. 14.2.10PACh. 14 - Prob. 14.2.11PACh. 14 - Prob. 14.2.12PACh. 14 - Prob. 14.2.13PACh. 14 - Prob. 14.2.14PACh. 14 - Prob. 14.2.15PACh. 14 - Prob. 14.2.16PACh. 14 - Prob. 14.2.17PACh. 14 - Prob. 14.2.18PACh. 14 - Prob. 14.3.1RQCh. 14 - Prob. 14.3.2RQCh. 14 - Prob. 14.3.3PACh. 14 - Prob. 14.3.4PACh. 14 - Prob. 14.3.5PACh. 14 - Prob. 14.3.6PACh. 14 - Prob. 14.4.1RQCh. 14 - Prob. 14.4.2RQCh. 14 - Prob. 14.4.3PACh. 14 - Prob. 14.4.4PACh. 14 - Prob. 14.4.5PACh. 14 - Prob. 14.4.6PACh. 14 - Prob. 14.4.7PACh. 14 - Prob. 14.4.8PACh. 14 - Prob. 14.2CTECh. 14 - Prob. 14.3CTE
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