Question 1: Consider the following game played by two major Hollywood studios, D

Question

Question 1: Consider the following game played by two major Hollywood studios, Disney and Fox. Disney is choosing when to release the new installment of their ‘Avengers’ franchise, while Fox is deciding on a release date for the new film in their ‘X-Men’ series. Suppose they are considering three possible release dates: one in May (around Memorial Day), one in July (around Independence Day), and one in September (around Labor Day).
If both Disney and Fox choose to release their respective films in May, the ‘Avengers’ movie will net Disney $150 million and the ‘X-Men’ movie will give Fox a profit of $100 million. If both companies open their movies in July, Disney turns a profit from its ‘Avengers’ sequel of $100 million and Fox makes $50 million from its ‘X-Men’ release. If Disney and Fox both set a September release date, their respective profits will be $50 million and $0 million.
If Disney chooses a May opening when Fox does not, its ‘Avengers’ movie will turn a profit of $300 million. If Disney chooses a July opening when Fox does not, Disney’s profit from its ‘Avengers’ movie will be $200 million. If Disney opens its film in September when Fox does not, Disney will make $100 million.
If Fox chooses a May opening when Disney does not, its ‘X-Men’ movie will turn a profit of $250 million. If Fox chooses a July opening when Disney does not, Fox’s profit from its ‘X- Men’ movie will be $150 million. If Fox opens its film in September when Disney does not, Fox will make $50 million.
1. a) Construct the payoff matrix that represents this game in normal form and solve it. Explain how you reached your answer (make sure to identify any dominated or dominant strategies).
2. b) As a result of your analysis in (a), can you think of a possible strategic move for either studio? Explain.

Question 2: Springfield has only two pastry shops, which were established around the same time and have a similar market share. Consumers in Springfield appear to regard both pastry shops’ cakes to be equally good –they cannot taste the difference. Each pastry shop bakes its cakes in the premises, and neither can easily expand output given its limited oven capacity.

Question 3:
A credit ratings agency (i.e., Fitch Ratings, Standard & Poor's Financial Services, or Moody's Investors Service) rates the creditworthiness of issuers of debt obligations such as corporate bonds. Explain what asymmetric information problem in financial markets is mitigated by the existence of credit ratings agencies. Does the existence of credit ratings agencies benefit only investors, or does it also benefit the corporations that are trying to raise financing?
Question 4:
A pastry shop in Fairview makes delicious pies using a secret recipe. It currently sells 200 pies a month at a price of $10 each. The manager has estimated the elasticity of demand for these pies in Fairview and found it to be –1.25.
3. a) By how much should the manager expect the number of pies sold to decrease if he started charging $10.40 per pie instead of $10?
4. b) Assuming the manager is maximizing the profit of the pastry shop, what must be the pastry shop’s marginal cost of production of pies?

Explanation / Answer

Question 2: question is incomplete

Question 4:

A pastry shop in Fairview makes delicious pies using a secret recipe. It currently sells 200 pies a month at a price of $10 each. The manager has estimated the elasticity of demand for these pies in Fairview and found it to be –1.25.

3.         a) By how much should the manager expect the number of pies sold to decrease if he started charging $10.40 per pie instead of $10?

The formula for price elasticity is:

Elasticity of demand = (% Change in Quantity) / (% Change in Price) ---------------------------1

We have P0 = $10 and increase price P1 =$10.40

Again, we have Q0 = 200 lets assume new quantity will be x

% change in price = ((P1 – P0)/P1)*100

Put the value of P0 and P1 in the formula,

We get

% change in price = ((10.4-10)/10)*100 = 4%

Given

The elasticity of demand = -1.25

We can write equation 1 as

-1.25 = (((x-200)/200)*100) / (4)

Solve for x,

-1.25*4 = (x-200)/2

(x-200)/2 = -5

X = (-5*2) + 200

X = 190

So the new quantity will be 190

As price increases from $ 10 to $10.4, quantity demand will decrease from 200 to 190.

4.         b) Assuming the manager is maximizing the profit of the pastry shop, what must be the pastry shop’s marginal cost of production of pies?

The manager is maximizing the profit of the pastry shop.   Maximizing profit requires marginal revenue equals marginal cost, so

MR = p (1 + 1/e) = MC

P = MC (e/(e+1))

We have elasticity of demand = -1.25 and P =$10

10 = MC (-1.25/(-1.25+1)

10 = MC (5)

MC = 2

pastry shop’s marginal cost of production of pies is $2.

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