ECON 213 Problem Set ch. 13 Liberty University Solution

01Question

The following table reports the four-firm concentration ratio for five different industries:

Refer to the table above. In which industry do the four largest firms have the most market power?

Refer to the table above. In which industry do the four largest firms have the least market power?

02Question

Consider a cartel, the Organization of the Rice Exporting Companies (OREC), which is a group of rice-exporting countries. Although OREC has eight members, let’s keep it simple and assume there are only two: China and Vietnam. The figure below shows the payoff matrix for the game.

Each country must choose how much rice to produce, either low output or high output. Note that this payoff matrix is not symmetric. At any outcome, China makes more money than Vietnam because China is the dominant member of OREC.

If the countries colluded,

China’s dominant strategy is to produce a

Vietnam’s dominant strategy is to produce a

The Nash equilibrium for these two countries is

Suppose that the countries try to cooperate over a longer time. Although this strategy allows the countries to develop strategies like tit-for-tat, which may sustain collusion, cartel members may still try to cheat. Which of the two countries is more likely to cheat on a cartel agreement?

03Question

Rachel and Joey are two students who are dating. Before they left for class this morning, they decided to meet for dinner in the evening. After their last class, they go home and get ready for their date. Unfortunately, although they both remember the time—7:00 p.m.—neither of them can remember where they agreed to meet: Clementine or Beyond. Also, there is no way for them to contact each other before 7:00 p.m. Where should they go? Let’s assume that Joey prefers Clementine to Beyond, but Rachel prefers Beyond to Clementine. Joey loves Rachel, however, so he would rather be with her at Beyond than by himself at Clementine. Rachel loves Joey, so she would rather be with him at Clementine than by herself at Beyond. The figure below is the payoff matrix, where the payoffs are measured in utils (happy points).

What is Joey’s dominant strategy?

What is Rachel’s dominant strategy?

What is the Nash equilibrium?

04Question

Indicate whether each group or association benefits from network externalities.

Network externalities are important because

05Question

The following table shows your neighorhood’s demand for drinking water. Assume that only two firms (Waterland and Aquataste) produce and sell water in this market. Each firm offers the same quality, no fixed costs are incurred in the production of water, and each firm’s marginal cost is constant and equal to $0 because both companies can pump as much water as needed without cost. Because marginal cost is constant and equal to $0, total revenue is equal to total profit.

Assume Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750.

If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would then increase from $375 to (Provide your answer to two decimal places.