Author Question: Refer to Figure 15-15. Erickson Power is a natural monopoly because A) average total cost is ... (Read 45 times)

james0929 · **on:** Jun 29, 2018

Refer to Figure 15-15. Erickson Power is a natural monopoly because

A) average total cost is still declining when it intersects demand.
B) of its continually declining marginal revenue curve as output rises.
C) it is a power company and all power companies are natural monopolies.
D) its marginal cost lies entirely below its long-run average cost.

Question 2

Refer to Figure 14-9. Uniguest, Inc is a company that provides PCs with internet access and touch-sensitive screens to hotels.

Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniguest that it is considering installing these systems in its hotel rooms. The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniguest's systems in its rooms. The two companies begin bargaining over what price the Hard Rock will pay Uniguest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniguest.
a. Suppose the Hard Rock offers Uniguest 1,200 per system. Will Uniguest accept or reject this offer? Why?
b. Suppose the Hard Rock offers Uniguest 800 per system. Will Uniguest accept or reject this offer? Why?
c. Suppose Uniguest attempts to obtain a favorable outcome from the bargaining by telling the Hard Rock it will reject an 800-per-system offer. If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniguest do? Why?
d. Is there a subgame-perfect equilibrium in this situation? Explain.

frre432 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A

Answer to Question 2

a. If the Hard Rock offers Uniguest 1,200 per system, Uniguest will accept the offer because its total profit will increase from 1 million to 1.6 million.
b. If the Hard Rock offers Uniguest 800 per system, Uniguest will accept the offer because its total profit will increase from 1 million to 1.2 million.
c. If the Hard Rock does not believe the threat is credible, it will offer 800 per system and Uniguest will accept the offer, because its profit will still increase form 1 million to 1.2 million.
d. A subgame-perfect equilibrium does exist, and it occurs if the Hard Rock offers 800 per system. If the Hard Rock offers 800 per system, neither the Hard Rock nor Uniguest can make itself better off by changing its decision at any decision node. If the Hard Rock changed its decision and offered 1,200 per system, its additional profit would decline. If Uniguest changed its decision and rejected the 800 offer, its total profit would decline.