ECO 550 Assignment #3
Game Theory and Monopolies by ECO 550 Assignment #3
1. Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn’t matter which side it is as long as everyone chooses the same side. Otherwise, everyone may get hurt. Driver 2 Left Right
Driver 1 Left 0,0 -1000 -1000 Right -1000, -1000 0,0
a. Does either player have a dominant strategy? No. A Dominant Strategy is “a strategy that results in the best outcome or highest payoff to a given player no matter what action or choice the other player makes” (Farnham, 2010, p. 233). In a situation such as this, there has to be cooperation, or the consequences could be deadly.
b. Is there Nash equilibrium in this game? Yes, if both drivers chose either left or right, there would be equilibrium, since they are “choosing their best strategy, given the actions of the other players,” (p. 234).
c. Why this game is called a cooperative game? Given the consequences of life and death, cooperation is needed by both drivers to achieve the optimal outcome. Both drivers must choose either Left or Right, so communication and cooperation are needed.
2. Using the chart, Figure 1. below, answer the following questions.
a. What is the firm’s Total Revenue? This firm will produce where Marginal Cost (MC) is equal to Marginal Revenue (MR). MC = MR at point G. Total Revenue is equal to Price times the Quantity or TR = (P)(Q). This is a monopoly and it will produce at the demand curve; so, the point is shifted to point J. Therefore, total revenue can be represented by area enclosed by the points 0, A, J, and E.
b. What is the Total Cost? The firm’s costs can be determined at the intersection of E with the ATC, or point H. So, total costs are the area of B, H, E and 0.
c. What is the firm’s Total Profits? As we have determined that the firm will produce at the output level E, where MR=MC, the monopolist can charge up to the A price where E intersects with the Demand curve. The firm’s profits can be determined by locating where the ATC intersects with E, or point H; therefore the area of the space enclosed by points B, A, J and H are the firm’s economic profits.
d. If the above monopolist were to behave like a perfectly competitive firm (operating in the long run), determine its output. If the firm were to behave as though it were in a perfectly competitive market it would operate as though its ATC was above the Demand curve and intersected at the point where MC intersected the Demand curve, point N. Therefore, the firm would produce at quantity M. It would be producing more, but at a cheaper price.

Figure 1.
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References
Farnham, Paul. “Economics for Managers”. 2010 Customer Edition. Pearson Learning Solutions.
Boston, MA. 2010