7.) Suppose that Niand Adidas are the only sellers of athletic footwear in the U

Question

      7.) Suppose that Niand Adidas are the only sellers of athletic footwear in the US>   They are dciding how much to charge for similar shoes.   The two choices are "Low" and "High". The payoff (profit as millions 2X2 matrix.

  Nike Low/Adidas Low = 1.0/0.5

Nike Low/Adidas High = 1.7/0.3

  Nike High/Adidas Low = 0.8/0.6

Nike High/Adidas High = 1.2/0.7

a.) Is there a dominant strategy for Nike? Is thaere a dominant strategy for Adidas?

b.) If nike is the price leader and the first mover, what will be the Nash equilibrium in the game?

5.) Suppose that a monopoly faces inverse market demand function as P = 70 - 2Q and its marginal cost functin is MC = 40-Q.

a.) What should be the monopoy's profit maximizing output.

b.) What is the monopoly's price?

2.) EverKleen Pool Services has a four month service contract for $115 with fixed costs of $3,500. SMC = 125 - 0.42Q + 0.0021Q^2 where SMC is measured in dollars and Q is the number of pools serviced each summer.

a.) Given the estimated marginal costs function, what is the average variable cost functin for EverKleen?

b.) Should the manager of EverKleen continue to operate, or should the firm shut down? Explain/

c.) How much profit (or loss) can the manager of EverKleen Pool Services expect to earn?

Explanation / Answer

a. Nike has a dominant strategy to go “high.†Adidas does not have a dominant strategy.

b. This game will still have an outcome: Adidas can determine that Nike will go high, so it will go high also.

c. Nike would choose the outrageously high price if it believed that Adidas would follow. Nike would earn $1.2 million in profits and Adidas would earn $600,000 in profits. While Nike would have an incentive to charge the high price if Adidas charged the outrageously high price, Nike would know that Adidas would follow Nike’s pricing, and this would reduce Nike’s profit. Therefore, the outcome of the game with Nike as price leader is that both charge the outrageously high price.

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