Download Chapter 11 - Iowa State University

Chapter 11
Monopolistic Competition
Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Veronica
Econ 101
Kreider
12-8-14
1. Define:
a. Oligopoly:
Oligopoly terms:
Game theory
Definition or Example
Dominate strategy
Repeated play
Tit-for-tat
Explicit collusion
Cartel
Tactic collusion
Price leadership
2. Using the following game, what would be the
outcome if:
a. both players have dominant strategies
b. Only Colin plays a dominant strategy
c. neither player has a dominant strategy.
3. Finally, there is government. In this chapter,
we’ve discussed two ways that government limits oligopoly power:
a.
b.
4. In a small Nevada town, Ptomaine Flats, there are only two restaurants, the Road
Kill Café and Sal Monella’s. Each restaurant has to decide whether to clean up its
act or continue to ignore health code violations. Each restaurant currently makes
$7,000 a year in profit. If they both tidy up a bit, they will attract more patrons but
must bear the (substantial) cost of the cleanup; so they will both be left with a
profit of $5,000. However, if one cleans up and the other doesn’t, the influx of
diners to the cleaner joint will more than cover the costs of the scrubbing; the
more hygienic place ends up with $12,000, and the grubbier establishment incurs
a loss of $3,000.
a. Write out the payoff matrix for this game, clearly labeling strategies and
payoffs to each player.
b. What is each player’s dominant strategy?
c. What will be the outcome of the game? Explain your answer.
d. Suppose the two restaurants believe they will face the same decision
repeatedly. How might the outcome differ? Why?
e. Assume that if one cleans up and one stays dirty, the cleaner restaurant
makes only $6,000 in profit. All other payoffs are the same as before.
What will the outcome of the game be now without cooperation? With
cooperation?
5. Assume that Nike and Adidas are the only sellers of athletic footwear in the
United States. They are deciding how much to charge for similar shoes. The two
choices are “High” (H) and “Outrageously High” (OH). Nike’s payoffs are in the
lower left of each cell in the payoff matrix below: a. Do both companies have
dominant strategies? If so, what
are they?
b. What will be the outcome of
the game?