Managerial Economics: Notes

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1. Choosing Prices to maximize Revenue/Profit:
EXAMPLE/ The Village of Oakland Township made an offer to both the Detroit Pistons and the Detroit Lions to relocate. While both teams charged "monopoly prices" for the average ticket to a game at their original suburban locations, the Lions did relocate, and cut average ticket prices to the Cournot competitive levels. The Pistons' demand function is given by: QP = 200 - 6PP + 2PL, while that of the Lions is given by: QL = 150 + 2PP - 5PL,

where Q is thousands of patrons per week, and P is the average ticket price. a) Draw up a payoff matrix determining the revenue that the two teams made at their original locations, and when one or both were to relocate and charge the Cournot competitive price. b) What price would maximize the Pistons’ revenue if it were the only team to relocate? c) What maximizes the Pistons’ revenue as the second team to relocate? d) Is there an advantage to being the first mover in b) above? 2. Problems like the airline games (as follows):

EXAMPLE/ American Airlines and Delta currently control all of the passenger traffic traveling out of Kansas City Airport toChicago. There are 2000 passengers who make this trip daily, and the airlines have agreed not to engage in price competition, but to compete based on market shares. So, at a price of $225 per ticket, they divvy up the $450,000 in revenue in a manner that is based on the share of the total number of flights each provides. Both airlines operate 200 passenger aircraft, which cost $20,000 per aircraft to operate (assume this does not vary with the number of passengers). American currently has 4 flights and Delta 6 flights daily. Complete the payoff matrix. Should American attempt to increase its market share (by increasing its number of flights)? Determine Delta’s profits for AA’s operation of 4-8 flights.

In an uncertain world, how would you determine each firm’s expected profits? 3. ENTRY DETERRENCE (A VERY IMPORTANT CONCEPT. Please...
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