Homework 7 Questions Managerial Economics BA 445 B.3 Stackelberg Duopoly Question 1: You are a manager of Kleenex and you compete directly with Puffs selling facial tissues in America. Puffs expects to select its output in October of next year, and Kleenex expects to select its output in September of next year. Consumers find the two products to be indistinguishable. The inverse market demand for the products is P = 6 -3Q (in dollars) and both firms used to produce at a constant unit cost of $3. However, the engineering department at Kleenex estimates that it can reduce marginal cost to $2 if they develop a new procedure. That new procedure is estimated to cost $1 to develop. Should Kleenex develop that new procedure? Answer to Question:Homework 7 Questions Managerial Economics BA 445 B.3 Selling Technology Question 2: You are a manager of Nvidia and your only significant competitor in the mainstream graphics card market is the ATI subsidiary of Advanced Micro Devices. ATI expects to select its output of the next generation of graphics card in October of next year, and Nvidia selects its output in November of next year. Nvidia’s graphics cards and ATI’s graphics cards are indistinguishable to consumers. The inverse market demand for graphics cards is P = 3-Q (in dollars) and both firms used to produce at a constant unit cost of $1.50. However, you just found a better way to produce graphics cards, which reduces your constant unit cost to $1.00. Should Nvidia keep that procedure to itself? Or is it better to sell that secret to ATI so that both Nvidia and ATI can produce at a constant unit cost of $1.00? And if it is better to sell that secret, compute the range of sales prices that are acceptable to both parties. Answer to Question:Homework 7 Questions Managerial Economics BA 445 B.4 Weakly Dominated Strategies Question 3: Sam’s Club and Costco are each planning to open a new store somewhere in Los Angeles (Northridge, Hollywood, Brentwood, or San Pedro) next year. They each face a tension, common in strategic decision making, between cooperating and locating far apart to maximize the total number of customers reached by both stores and competing and locating close together to increase their own share of the total number of customers. That tension between cooperation and competition results in the profit payoffs in the normal form below. Where should the stores locate if they both choose their locations in February of next year? Be sure to explain your answer. Where should Costco locate if Sam’s choose its location in February of next year, and Costco chooses in January of next year? Answer to Question: Northridge Hollyw ood Brentw ood San PedroNorthridge7,1 5,4 0,5 1,1Hollyw ood2,1 3,3 8,3 1,2Brentw ood0,0 5,4 7,2 0,0San Pedro8,2 -2,0 0,3 -1,4CostcoSam'sHomework 7 Questions Managerial Economics BA 445 B.4 Rationalizable Strategies Question 4: MillerCoors and Anheuser-Busch control a large share of the U.S. Domestic beer market. The retailers compete on price but consumers do not find the goods to be perfect substitutes. Suppose MillerCoors and Anheuser-Busch consider prices $10, $12, $14, and $16 for a 24-pack of beer. Suppose demands and costs are known, and result in the following profit table (the entries are profits): Suppose they both choose price in November of next year. What price should Miller choose? What price should Busch choose? Are there mutual gains from cooperation? Can Miller trust Busch to cooperate? Can Busch trust Miller to cooperate? Now suppose Miller chooses its price in December of next year, and Busch chooses in October of next year. What price should Miller choose? What price should Busch choose? Are there mutual gains from cooperation? Be sure to explain your answers. Answer to Question: $10 $12 $14 $16$10 3,4 6,5 7,2 3,1$12 4,9 3,3 4,4 5,8$14 5,3 5,7 3,4 7,6$16 4,5 4,5 5,4