2. JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future. (1) What is the appropriate economic model to study price competition in this market, and why? (i) If you use Nash equilibrium to make a prediction, what price is each airline going to charge? Explain your reasoning. (iii) Give two possible practical means by which the airlines could earn more than predicted in (ii).

2. JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future. (1) What is the appropriate economic model to study price competition in this market, and why? (i) If you use Nash equilibrium to make a prediction, what price is each airline going to charge? Explain your reasoning. (iii) Give two possible practical means by which the airlines could earn more than predicted in (ii).

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter16: Bargaining

Section: Chapter Questions

Problem 16.1IP

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JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future. (a) What is the appropriate economic model to study price competition in this market? (b) If you use Nash equilibrium to make a prediction, what…
JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week’s profits, and that neither one would consider shutting down the route in the foreseeable future. a) What is the appropriate economic model to study price competition in this market, and why? b) If you use Nash equilibrium to make a…
18.7 Suppose 100 cars will be offered on the used-car market. Let 50 of them be good cars, each worth $10,000 to a buyer, and let 50 be lemons, each worth only $2,000. Compute a buyer’s maximum willingness to pay for a car if he or she cannot observe the car’s quality. Suppose that there are enough buyers relative to sellers that competition among them leads cars to be sold at their maximum willingness to pay. What would the mar- ket equilibrium be if sellers value good cars at $8,000? At $6,000?
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8. Two states, A and B, have signed an arms-control agreement. This agreementcommits them to refrain from building certain types of weapons. The agreement is supposed tohold for an indefinite length of time. However, A and B remain potential enemies who wouldprefer to be able to cheat and build more weapons than the other. The payoff table for A (player1, the row player) and B (player 2, the column player) in each period after signing thisagreement is below. a) First assume that each state uses Tit-for-Tat (TFT) as a strategy in this repeated game.The rate of return is r. For what values of r would it be worth it for player A to cheat bybuilding additional weapons just once against TFT? b) For what values of r would it be worth deviating from the agreement forever to buildweapons? c) Convert both values you found in parts a and b to the equivalent discount factor dusing the formula given in lecture and section. d) Use the answers you find to discuss the relationship between d and r:…
There are a kicker and a goalie who confront each other in a penalty kick that willdetermine the outcome of the game. The kicker can kick the ball left or right, while the goaliecan choose to jump left or right. Because of the speed of the kick, the decisions need to bemade simultaneously. If the goalie jumps in the same direction as the kick, then the goalie winsand the kicker loses. If the goalie jumps in the opposite direction of the kick then the kickerwins and the goalie loses. Model this as a strategic form game and write down the matrix thatrepresents the game you modeled. Find the Nash equilibrium.
5) Suppose that the letter grade earned on a test for each student in a class depends upon how well he/she does relative to other students in the class. This exhibit shows a prisoner’s dilemma setting for two representative students in the class, George and Gina. What is the expected final Nash Equilibrium? a) Study 4 hours for both Gina and George. b) Study 2 hours for both Gina and George. c) George studies for 2 hours, and Gina studies for 4 hours. d) George studies for 4 hours, and Gina studies for 2 hours.
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Question 1.Assume there are only two art auction companies who account for 100% of all the sales of 19thCentury impressionist master work paintings in the world. Assume that each company buys thiskind of painting and then resells the paintings at monthly auctions. Ignoring the question of anylaws that might apply, describe what economic arrangement would maximize the twocompanies’ total profits? Show with supply and demand curves what profit they would makefrom this arrangement and what societal welfare loss, if any, results from it.