Question

U2. There are two movie theaters in the town of Harkinsville: Modern Multi plex, which shows first-run movies, and Sticky Shoe, which shows movies that have been out for a while at a cheaper price. The demand for movies at Modern Multiplex is given by QMM 14-PMM + Pss, while the de- mand for movies at Sticky Shoe is Qss-8-2PssPM where prices are in dollars and quantities are measured in hundreds of moviegoers. Mod- ern Multiplex has a per-customer cost of S4, while Sticky Shoe has a per- customer cost of only $2. (a) From the demand equations alone, what indicates whether Mod- ern Multiplex and Sticky Shoe offer services that are substitutes or complements? (b) Write the profit function for each theater in terms of Pss and PMM Find each theater's best-response rule. (c) Find the Nash equilibrium price, quantity, and profit for each theater. (d) What would each theater's price, quantity, and profit be if the two decided to collude to maximize joint profits in this market? Why isn't the collusive outcome a Nash equilibrium?

Answer 1

Modern multiplex and stick shoes are substitutes.In the demand equation,the quantity of modern multiplex and price of sticky shoes are positively related.It means that when price of sticky shoes rise,the demand fpr modern multiplex rise.Therefore,they are substitutes.