# Managerial Economics: Final Example

Topics: Costs, Marginal cost, Variable cost Pages: 11 (3219 words) Published: March 18, 2011
1. Game Theory

Barbara:
a.Both Compete = 12 points (individually) ? 24 points (together) b.Monopolize = 18 points (individually) ? 20 points (together) c.Cooperates = 2 points (individually) ? 20 points (together) d.Monopolize = 8 points (dual) ? 16 points

Juanita:
e.Both Compete = 12 points (individually) ? 24 points (together) f.Monopolize = 18 points (individually) ? 20 points (together) g.Cooperates = 2 points (individually) ? 20 points (together) h.Monopolize = 8 points (dual) ? 16 points

Matrix:

1-A Question 1:
If the players play only once, what strategy do you expect the players to adopt? Answer 1:
An assumption is made that it is an implicit understanding that each player wants to play hard and score as many points as possible in a given basketball game. If the players play together only once against another opponent the best strategy for each of them to take is monopolistic. The reasoning behind this assertion is that, first, each player does not have the explicit knowledge that the other player will cooperate with them during the game and vice-versa. Thus it is in each of their interests to try and own the game singly. Second, if one player were to allow the other player to monopolize the game a non-equilibrium outcome would be seen. Third, there is significant disutility if one player allows the other player to steal all the glory, by allowing the other player to singly monopolize the game. Thus, if each player concentrates on owning the game a dominant strategy is uncovered.

1-A Question 2:
If the players expect to play in many games together, what strategy do you expect the players to adopt? Answer 2:
An assumption is made that there is an implicit understanding that the two players are members of a team that is trying to win a specific title, e.g. Fordham’s goal of winning the 2007 Atlantic 10 conference women’s basketball championship. In this case, Barbara and Juanita are keenly aware of their own and each other’s potential scoring abilities and that is in each of their interests to cooperate during any given game. When both of the best offensive players (Barbara and Juanita) cooperate during a game the team has the greatest potential of earning the most number of points and thus winning the game. The greater the potential to win more games leaves their team that much closer to winning the championship.

1. Game Theory
B. (Airlines)
1-B Question 1:
Using the language of game theory, explain the airline’s dilemma. Answer 1:
Airlines in the United States have experienced reduced profitability due to airline passengers deciding to carry-on multiple pieces of luggage. These airlines experience a distinct dilemma in that they must devise a solution to the problem as well as be mindful of the actions and reactions of their rivals, i.e. strategic moves. However, in this particular case an individual airline does not have the capability of developing a dominant strategy. A dominant strategy does not exist due to the nature of the problem, in that if one of the airlines were to establish a more strict policy on the numbers, size and or weight of an individual passenger’s allotted carry-on luggage parameters then rival airlines would have the ability to attract their disgruntled airline passengers, thus reducing their profitability even more. The best-case scenario for the airlines is to adopt a coordination strategy together, whereby, all of the airlines could benefit from the same update in carry-on luggage parameters.

1-B Question 2:
Was the airline’s lobbying for government regulation consistent with economically rational behavior? Answer 2:
The airline’s lobbying for government regulation in regards to carry-on luggage parameters is consistent with economically rational behavior. The soundness in the argument lies in implicit versus explicit contracts. If one of the airlines was able to convince its rivals...