What are the assumptions of the kinked demand curve model? What is its main
conclusion about oligopoly behavior? How realistic is the model?
Explain with an example the potential benefit of competitive bidding versus bargaining
to secure a better price by a seller.
A would-be acquirer is preparing to make a first-and-final tender offer to acquire target
Company T. The acquirer judges that Company T’s reservation value is somewhere
between $60 and $90 per share, with all values in between equally likely. Under its own
management, the acquirer predicts that the target will be worth $100 per share. Should
the firm offer $90 per share to assure that Company T will sell out? Determine the offer
that maximizes the acquirer’s expected profit.
Jim Bradley is the manager of a bakery, located on a major intersection in a suburban
area of Midwestern city. He has been collecting data on sales at his store for the past
year. Recently, he has developed a model that he thinks explains sales at the bakery.
Unfortunately, he never had a course in statistics, and isn’t sure that he has done his
regression analysis correctly and asks for your opinion.
According to Jim, weekly sales at the Bradley Bakery can be described by the equation:
Q = 5,000 – 1,000P + 10A + 1.5Y + 400Pc– 25Ac, where Q denotes unit sales, P is the
firm’s price, A is the firm’s advertising spending, Y is the per capita income in the local
area, Pcis the average price charged by a nearby competing bakery and Acis the rival’s
advertising spending. Jim didn’t keep the printout from the analysis. He only kept the
equation, which he is eager to use to plan for his likely sales in the next few months.
What advice would you give Jim about using the equation?
The marginal cost of a firm under perfect competition is given by the equation MC =
2QF − 20. The market price is $50 per unit. Determine the firm’s profit-maximizing
level of output. Write down the equation for the firm’s supply curve.
Determine each player’s equilibrium mixed strategy in the following non-zero-sum
game.
A firm’s long-run average cost curve is estimated by the equation: LAC = 1,000 ‘“ 2.5Q
+ .005Q2. What is the minimum efficient scale of production?