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Introduction to Economics – Problem 7The figure shows the situation facing Lite and Kool plc., a European producer of running shoes.45720039369What quantity does Lite and Kool produce?What does it charge?How much profit does Lite and Kool make?The figure shows the situation facing Well Done plc., a European producer of steak sauce.54292526035What quantity does Well Done produce?What does it charge?How much profit does Well Done make?A firm in monopolistic competition produces running shoes. If it spends nothing on advertising, it can sell no shoes at $100 a pair and, for each $10 cut in price, the quantity of shoes it can sell increases by 25 pairs a day so that at $20 a pair, it can sell 200 pairs a day. The firm’s total fixed cost is $4,000 a day. Its average variable cost and marginal cost is a constant $20 per pair. If the firm spends $3,000 a day on advertising it can double the quantity of shoes sold at each price.If the firm doesn’t advertise, what is the quantity of shoes produced and what is the price per pair?What is the firm’s economic profit or economic loss?If the firm does advertise, what is the quantity of shoes produced and what is the price per pair?What is the firm’s economic profit or economic loss?Will the firm advertise or not? Why?The firm in exercise 3 has the same demand and costs as before if it does not advertise. But it hires a new advertising agency. If the firm spends $3,000 a day on advertising with the new agency, it can double the amount that consumers are willing to pay at each quantity demanded.If the firm hires the new agency, what is the quantity of shoes produced and what is the price per pair?What is the firm’s economic profit or economic loss?Will the firm advertise or not? Why?What is the firm’s economic profit in the long run?A firm with a kinked demand curve experiences an increase in its fixed costs. Explain the effects on the firm’s price, output and economic profit/loss.A firm with a kinked demand curve experiences an increase in its variable cost. Explain the effects on the firm’s price, output and economic profit/loss.An industry with one very large firm and 100 very small firms experiences an increase in the demand for its product. Use the dominant firm model to explain the effects on the price, output and economic profit of:The large firm.A typical small firm.An industry with one very large firm and 100 very small firms experiences an increase in total variable cost. Use the dominant firm model to explain the effects on the price, output and economic profit of:The large firm.A typical small firm.Consider the following game. The game has two players, and each player is asked a question. The players can answer the question truthfully or they can lie. If both answer truthfully, each receives a payoff of $100. If one answers truthfully and the other lies, the liar gains at the expense of the honest player. In that event, the liar receives a payoff of $500 and the honest player gets nothing. If both lie, then each receives a payoff of $50.Describe this game in terms of its players, strategies and payoffs.Construct the payoff matrix.What is the equilibrium for this game?Describe the game known as the prisoners’ dilemma. In describing the game:Make up a story that motivates the game.Work out a payoff matrix.Describe how the equilibrium of the game is arrived at.Two firms, Soapy and Suddsies plc., are the only producers of soap powder. They collude and agree to share the market equally. If neither firm cheats on the agreement, each makes $1 million economic profit. If either firm cheats, the cheater increases its economic profit to $1.5 million while the firm that abides by the agreement incurs an economic loss of $0.5 million. Neither firm has any way of policing the other’s actions.Describe the best strategy for each firm in a game that is played once.What is the economic profit for each firm if both cheat?Construct the payoff matrix of a game that is played just once.What is the equilibrium if the game is played once?If this duopoly game can be played many times, describe some of the strategies that each firm might adopt.Two firms, Faster and Quicker, are the only two producers of sports cars on an island that has no contact with the outside world. The firms collude and agree to share the market equally. If neither firm cheats on the agreement, each firm makes $3 million economic profit. If either firm cheats, the cheater can increase its economic profit to $4.5 million, while the firm that abides by the agreement incurs an economic loss of $1 million. Neither firm has any way of policing the actions of the other.What is the economic profit for each firm if they both cheat?What is the payoff matrix of a game that is played just once?What is the best strategy for each firm in a game that is played once?What is the equilibrium if the game is played once?If this game can be played many times, what are two strategies that could be adopted? ................
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