ECON 5315: Homework for pp. 9-37, Review of Microeconomics
answer all questions
[#s 2, 3, 4 & 9 are adapted numbered questions in our text.]
2. If the ATC curve is rising, does that mean the MC curve must lie above it? Explain. (1 point)
3. Why are LRAC curves usually at or below SRAC curves? (1 point)
4. a. What is the difference between economic profit and accounting profit? (1 point)
b. Why should managers mainly focus on economic profits? (1 point)
c. Why do you suppose managers often focus on accounting profits? (1 point)
9. Is the prisoner’s dilemma always a Nash equilibrium? Explain. (1 point)
A. Background. You do not need to know anything about the firms below in order to successfully complete this HW assignment. But this is a real case of two firms competing over a local market: I will use this example from time to time, in my chapter notes, in the HW assignments, and perhaps in quizzes and exams:
HEB, headquartered in San Antonio, TX, has had grocery stores in Corpus Christi, TX for many decades. For many years it has marketed itself as a “low cost” grocery store. Until about 10 years ago, its headquarters had been in Corpus Christi. In this local market, HEB has been successful in keeping out or driving out all other major regional and national grocery competitors. Walmart first came into Corpus Christi at least 30 years ago but did not have a “super store” with a major grocery section until about 20 years ago. It markets itself as proving “always the low cost, always.” HEB opened its first local super store, called “HEB plus,” approximately 15 years ago. Thus began the head-to-head competition between these two firms in this small local market.
- Suppose HEB can commit to selling a large quantity of output (through an HEB plus) or a small quantity of output (an HEB) in the Calallen area of Corpus Christi, on Farm-to-Market Road 624, before Walmart decides whether to rebuild its regular Walmart store there, replacing it with a Walmart Super Store. That is, HEB chooses whether to commit to a small quantity, or a large quantity, and then Walmart decides whether to rebuild to have a much larger one.
Suppose further: If HEB commits to the small quantity and if Walmart doesn’t rebuild, HEB nets $400,000 in the first year and Walmart nets $250,000 at the existing store (on Farm-to-Market Road 624). If instead Walmart does rebuild a large store on Farm-to-Market Road 624, Walmart nets $825,000 and HEB nets $200,000. If HEB commits to the HEB plus and Wal-Mart does not rebuild, HEB nets $1,700,000 and Walmart nets $100,000 at its existing store. If instead Walmart does rebuild, Walmart nets $1,350,000 and HEB nets $550,000.
i. Show the game tree described above, being careful to label accurately and completely. (Word has drawing tools; the only one you’re likely to need is the arrow. Or you can draw this free-hand and send a PDF or a photo) (2 points)
ii. What is HEB’s likely decision? Why? (1 point)
iii. What is Walmart’s likely decision? Why? (1 point)
- Why is it important for these two firms to know the price elasticity of demand for the products it sells? (1 point)