Question

These question builds off the Section 3 Lesson, Practice Problem 2. They are to ensure you understand key technical definitions before advancing to part 2. Entrant (payoffs on right) Enter Don't enter Price High 20 10 50 o Monopolist (payoffs on left) Price Low 5 -10 10 O This is a simultaneous choice, non-cooperative game. There are four possible outcomes: Outcome 1: Monopolist Prices High, Entrant Enters Outcome 2: Monopolist Prices Low, Entrant Enters Outcome 3: Monopolist Prices High, Entrant Doesn't Enter Outcome 4: Monopolist Prices Low, Entrant Doesn't Enter

Answer 1

1)a) given entrant move enter , the best move for monopolist is to charge high price to maximize payoff.

Given entrant move don't enter ,the best move for monopolist is still charge high price to maximize payoff.

So irrespective of entrant move, best move for monopolist is vharge high price ,so monopolist has dominant strategy of charging high price.

B) given monopolist move high price, entrant best move is to enter

Given Monopolist move low price, entrant best move is don't enter.

So in different situation, entrant has different best moves,so it has no dominant strategy.

2)a) Monopolist= high, don't enter gives highest payoff to Monopolist equal to 50.

B) entrant= high enter,gives highest payoff to entrant equal to 10.

3)Nash Equilibrium is a situation from which no player wants to deviate ,given othwr player move is unchanged.

Given monopolist move, high price, best move for entrant is enter.

Given entrant move enter,best move for monopolist is high price.

So both are choosing their best move ,so they don't want to deviate from this situation,so that is why ( high price, enter) is nash Equilibrium.

4)a) It is because monopolist has to share of half of the market to entrant which results in lower quantity sold and thus result in lower profit and payoff.

B)It is because entrant has to bear a high fixed cost to enter the market. So lower price doesn't compensate that high fixed cost ,so entrant faces loss.