Econ 306 Intermediate Microeconomics Summer 2019
Colorado State University Extra Credit Briggs
Suppose the video game console market is dominated by two (anti-competitive) companies:
Microsoft and Sony (for this exercise assume that the other companies are so small the market is
considered to only have two suppliers). The market demand for energy drinks is given by ?? =
8000 – 10P, where ?? is quantity demanded (?? = ?? + ??) and P is price. In addition, both video
game console producers cu
ently use the same technology for producing video game consoles
which is given by ?? = 5[?
.??.?]. They also have the same costs given by the function: C =
1,000,000 + 5?? +
?
??
??
?. Suppose that r = 10 and w = 15.
A. Suppose the two dominant firms do not realize their market power. What is the market
output, price and consumer and producer surplus? Also, what are the individual market
supply quantities and profits? Should either of the firms shut down? How did you determine
this? Draw a diagram for the market and individual firm.
B. Suppose after the optimal quantity is determined (found in part A), the managers of
Microsoft want to find the cost minimizing level of capital and labor that can be used given
their cu
ent production process. Using the Lagrange multiplier method (look at the section
starting on pg. 147 in your book), find the cost minimizing levels of inputs and calculate the
average, marginal and total costs to the firm using the firm’s output function. Assume that
fixed costs are $1,000,000 and each unit costs (1.65+
1
20
??) in raw materials.
C. Suppose that the video game console producers realize that they are in effect a duopoly and
therefore have market power. Also, they both are able to cut their fixed costs by $500,000
(from here on out). They are afforded the rare opportunity to collude without federal
investigators knowing about the secret deal. What is the market output, price and consumer
and producer surplus and deadweight loss? Also, what are the individual market supply
quantities and profits? Draw a diagram of the market noting surpluses, profits and
deadweight loss.
D. Suppose that the video game console producers are unable to trust one another and
therefore collusion
eaks down. What is the market output, price and consumer and
producer surplus? Also, what are the individual market supply quantities and profits?
E. Suppose that Sony decides to make their move first in deciding how much to produce in the
market. What is the market output, price and consumer and producer surplus? Also, what
are the individual market supply quantities and profits?
F. After calculating parts A-E give your recommendation to the management of Microsoft as
to the best possible outcome of playing tit-for-tat in a finite and infinite game of prisoner’s
dilemma using a payoff matrix. Also, note any dominant strategies of the firms and Nash
equili
ia (in pure and mixed strategies). Thoroughly explain how you came to your
conclusion.