managerial economics

Display all calculations and briefly explain your answers.
Two firms sell output in a market. In an initial equilibrium, total market profits are 1000. Each firm is considering whether to advertise. Advertising costs 100. if either firm advertises, market profits increase by 20%. If both firms advertise, profits rise by 30% (i.e.: profits increase to 1300). In any case, the firms split market profits.

a) Summarize all possible outcomes in this advertising game using payoff matrix, and identify the equilibrium outcome.
b) Is advertising predatory or cooperative? Give a brief explanation.
c) Now consider a different market, where a monopolist faces a linear demand curve q= 10 – 40p + 20A, where p is the per unit market price and A is the monopolist’s expenditure on advertising. The monopolist is charging a price p=$0.25 and it spending $0.10 on advertising, solve for the price elasticity of demand and the advertising elasticity of demand.
d) Is the monopolist spending the optimal amount on advertising? Give a brief
If Coles wants to sell bananas, it must buy bananas grown in Australia, since banana imports in to Australia are not allowed. Coles faces the following market (inverse) demand curve for bananas:
Pc= 9 – q/4000

Where q is the number of kilograms of bananas, and pc is the price per kilogram of bananas at Coles. Growers of bananas in Australia charge Coles a price pg per kilograms of bananas. Coles’ marginal cost of marketing and selling bananas is $3 per kg. The marginal cost of growing bananas in Australia is $2 per kg. Suppose banana grower’ fixed costs are zero.

a)Write Coles’ total cost function foe selling bananas.

b)Solve for Coles’ profit-maximize demand for bananas as a function of the growers’ price pg.

c)If banana growers maximize profits, solve for pg, and the quantity of bananas bought by Coles. Suppose that growers can behave like a monopoly.

d)If Coles bought up all banana plantations in Australia, what is the optimal transfer price (T) Coles would charge itself for bananas? Compare T to pg.

e)Has the quantity of banana sold in Australia increased or decreased as a result of Coles buying up all banana plantations? Which market structure is preferred by banana growers? Give a brief explanation.

managerial economics


Joined September 2008

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