Problem Set 4

1.Movies are distributed in a variety of forms, not just first run theatrical presentations. What other ways are movies distributed? What are the different price points? Using this information, draw a fully labeled graph of the market for movies in which the distributor of the film price discriminates. (NOTE: This should not be perfect price discrimination.)

2. Assume the following game is played one time only. Based on the information in the payoff matrix, PNC Bank and Citizens Bank are considering an implicit collusive agreement on interest rates. Payoffs to the two firms are represented in terms of profits in thousands of dollars:

    Citizens Bank  
    ColludeRaise Rates Defect: Keep Rates where they are
PNC Collude: Raise Rates (900, 600) (700, 800)
  Defect: Keep Rates where they are (1100, 300) (800,400)

a. Does PNC have a dominant strategy? What is it? Does Citizens have a dominant strategy? What is it?

b. Does the result of your answer change if the game is played an infinite number of times? Why or why not. Properly use game theoretic terminology in your answer.

3. What is the profit maximizing output of the monopolist shown below?

Q= 30 where MR=MC

What price do they set? ______P=8_________________ What is the mark up over cost? _____markup=

Why will this price not fall?

4. Draw the cheese market for the United States showing the world price as the price for this market. How much cheese does the U.S. import at the world price? Now assume that the cheese lobby promotes and successfully gains a tariff on cheese. What happens to the price paid by cheese lovers in the U.S.? How does this change the value generated by the market? Why do you say this? Where does this appear in your graph?

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