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Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter4A: Problems In Applying The Linear Regression Model

Section: Chapter Questions

Problem 5E

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Question

Gater Tools, a profit-maximizing firm, has a patent on a power tool, making it the only producer of that power tool. The
graph above shows GaterTools' demand, marginal revenue, average total cost, average variable cost, and marginal cost
curves.
(a) Calculate GaterTools' total revenue if the firm produces the allocatively efficient quantity. Show your work.
(b) Starting at a price of $12, if GaterTools were to increase the price by 4%, will the quantity demanded decrease by
more than 4%, less than 4%, or exactly 4%? Explain.
(c) At a quantity of 10 units, is GaterTools' marginal product increasing, decreasing, or constant? Explain.

(f) Does GaterTools have a dominant strategy? Explain using numbers from the payoff matrix.
(g) Identify the Nash equilibrium. Explain why this is a Nash equilibrium using information from the payoff matrix.
(h) Suppose HandyBilt makes a credible commitment to GaterTools that if GaterTools maintains its price, then HandyBilt
will pay GaterTools $250. Will this offer result in a Nash equilibrium with different strategies from those identified in part
(g) ? Explain using numbers from the payoff matrix.

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
"Calculate," you must show how you arrived at your final answer.
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
Test
Test Booklet
Use the graph provided below to answer parts (a)-(e).
Marginal Cost
Average Total
Cost
Average Variable
Cost
12
10
8.
a bo shi
Demand
10 22 33
45
58
78
Quantity
Marginal
Revenue
GaterTools, a profit-maximizing firm, has a patent on a power tool, making it the only producer of that power tool. The
graph above shows GaterTools' demand, marginal revenue, average total cost, average variable cost, and marginal cost
curves.
(a) Calculate GaterTools' total revenue if the firm produces the allocatively efficient quantity. Show your work.
(b) Starting at a price of $12, if GaterTools were to increase the price by 4%, will the quantity demanded decrease by
more than 4%, less than 4%, or exactly 4%? Explain.
(c) At a quantity of 10 units, is GaterTools' marginal product increasing, decreasing, or constant? Explain.
(d) Identify the quantity that maximizes GaterTools' profit. Explain.
(e) At the quantity identified in part (d), does GaterTools earn a positive economic profit, a negative economic profit, or
zero economic profit? Explain.
Assume that GaterTools' patent expires. HandyBilt, a company with the capability to produce the same power tool as
ADMi i
Dege 0of
O Price, Cost ($)
CON 54

AP CollegoBoard
T Bookie
Micro- 4- Take home test
whether to advertise its entry into the market.
HandyBilt's payoff. Each player independently and simultaneously chooses its strategy. Use the matrix provided below to
answer parts (f)-(h).
HandyBilt
Advertise
Not Advertise
Maintain Price
$200, $850
$300, $250
GaterTools
Lower Price
$420, $400
$520, $440
(f) Does GaterTools have a dominant strategy? Explain using numbers from the payoff matrix.
(g) Identify the Nash equilibrium. Explain why this is a Nash equilibrium using information from the payoff matrix.
(h) Suppose HandyBilt makes a credible commitment to GaterTools that if GaterTools maintains its price, then HandyBilt
will pay GaterTools $250. Will this offer result in a Nash equilibrium with different strategies from those identified in part
(g) ? Explain using numbers from the payoff matrix.
16.
Respond to all parts of the question.
O Please respond on separate paper, following directions from
your teacher.
10 f 10
ADAM

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