MBA 201A: Economic Analysis for Business DecisionsFinal Exam - DraftQuestion 1: Warm U ps [20 points]a. [10 points] Two firms have to set their output capacity in a market thatthey are about to enter. The resulting payoffs are described by the follow-ing matrix:Column Ltd.Small Mid LargeSmall (6, 5) (4, 6) (3, 9)Row Inc. Mid (7, 3) (5, 5) (4, 4)Large (10, 2) (4, 3) (2, 1)What is (or are) the Nash equilibrium of this game?b. [10 points ] Alice is a bidder in a sealed-bid auction for a classic baseballcard. The value of the card to Ann is $5, 000. She doesn’t care abouthow much others value this card because she intends to keep it for herself.The auction rules state that the highest bidder gets the card and pays theamoun t of the second highest bid. Explain to Ann, who does not knoweconomics, why she should bid exactly $5, 000.(a) Ch oosing “Sm a ll” is a dom in a te d str a teg y for both players, i.e., not the bestresp o nse to anyth ing the o ther player cou ld do, so it ca n b e rem oved from thegame. In the remaining2 × 2-game b oth players have a dom inant strategy in“Mid,” i.e., it is the best response to all strategies by the other p layer. Therefore(M id ,Mid) is t h e un iq u e N a s h eq u ilib ri u m.(b) Call the highest bid by any other bidder b esides Ann$X. If Ann overbids to,say,$5100 then compared to truthful bidding that i) m akes no difference if X<5000, Ann still gets the card and pays X, ii) m akes no difference if X>5100,An n s ti ll doesn’t g e t th e c a rd , iii) hur ts Ann if5000 <X<5100, b ecause shegets the card but has to pay more than she values it. If Ann underbids to, say,$4900, then co mpare d to trut h fu l bidd ing it i) makes no difference if X>5000,b e ca u s e An n still do e sn ’t get the card, ii) ifX<4900 makes no difference,Ann still gets the card and paysX, iii) hurts A n n 4900 <X<5000 becau senow she do esn’t get the card but with a truthful bid she would have won andpaid les s th an h e r va lu e .Questio n 2: Bu nd lin g Cab le Services [20 points]1The sole cable service providor in a remote town can provide cable TV(service x) and internet access (service y). The company realizes that thereare four types of consumers, each with an equal n umber of customers. Thevaluations of each type for the two services is given in the following table.$WTP for Cable-TV $WTP for InternetType t11 8Type t24 7Type t37 4Type t48 1The fixed costs of installing the network have been made, and the marginal costsof providing the sevice are zero for every consumer.a. [5 points] If the company is consrtained by reguation to offer a price perservice and cannot sell both services together as a bundle, what would bethe profit-maximizing prices? What is the profit?b. [5 points] If the company is consrtained by reguation to offer a price forboth services combined (a bundle price) and cannot sell each service in-dependently, what w ould be the profit-maximizing bundle price? What isthe profit?c. [10 points] If the company is not consrtained by reguation so that it canoffer both price per service and bundle prices, what would be the profit-maximizing prices? What is the profit?(a) p _x = p_y = 7, profits = 28*t1(b) p_ B = 9, p ro fits = 36*t1(c) p_x = p_y = 8, p_B = 11, profits = 38*t1Question 3: The New Finance Textbook [25 points]A textbook publisher is considering signing up Hank Paulson and Ben Bernanketo write a new finance textbook titled “Just the Two of Us: Bailouts, Rescues,and Your Asset Portfolio.” The authors are asking to be paid 4 million dol-lars together, the promotion campaign w ould cost another million dollars andthe marginal costs of production and shipping is $20 per book.There are twodifferent markets: 100,000 undergraduates and 20,000 MBA students. Marketresearch suggests that the willigness to pay for this book is $80 for the under-graduates and $100 for the MBAs.a. [5 points] If the contract is signed, at what price would you recommendthat the publisher sell the book? Is it worth signing the contract?2You can enhance the book by creating a CD version of the text. Bothpopulations would benefit from having the CD, but the MBA students who allo w n cars would get more out of it as they drive on their weekend getaways.The willingness to pay for the book+CD package is $85 for the undergraduatesand $130 for the MBAs. The costs of recording the CD are $100,000, and themarginal costs are $0.5 per CD.b. [10 poin ts] If the publisher would offer two options for purchase, a book-only and a book+CD version, what prices would you recommend that itcharge for each option? Would you suggest that they do this compared tothe book-only case in part (a) abo ve?If the publisher uses thicker and hea vier paper then the book will be lessdesireable. The undergraduates will not suffer as much since they carry hugebackpacks, but the MBAs would just leave the book at home, and their will-ingness to pay for the book alone drops a lot, while less so for the book+CDoption. In particular, the new willingness to pay data for each group is:WTP UG WTP MBABook only 79 80Book+CD 84 125Using the heavier paper will increase the marginal costs to $21 per book.c. [10 points] If the publisher would offer two options for purchase as in part(b) but with the heavier paper, what prices would you recommend that itcharge for each option? Would you suggest that they switchto the heavierpaper?Answer:(a) Charge $80 and sell to all. Selling only to M BA s at $100 adds $20 on 20Kp eople but loses $6 0 o n 100K people. Profits are(80 − 20) × 120, 000 −4, 000, 000 − 1, 000, 000 = 2, 200, 000(b) If you charge $ 80 for b ook only then you can’t charge more th an $11 0 forbook+CD. Total profits are then(80 − 20) × 100, 000 + (110 − 20.5) ×20, 000 − 5, 000, 000 − 100, 000 = 2, 690, 000.Now if y ou sell the book+CD version to all students your profitis: (90 −.5 − 20) × 120000 − 5000000 − 100000 = 3. 24 × 106, which is better than sellingtwo different packages. So I would recommend only selling the CD version ofthe book.Note if UG TWP is $81 for book+CD, then we get selling this to every oneis: (85 − .5 − 20) × 120000 − 5000000 − 100000 = 2. 64 × 106=2. 16 × 106,whichis worse than any of the abo ve options.3(c) Now you charge $79 p er b o ok only and $124 for b o ok+CD and total prof-its are(79 − 21) × 100, 000 + (124 − 21.5) × 20, 000 − 5, 100, 000 =2, 750, 000.So …