2015 AP Microeconomics Exam FRQ #2
(a) Does each shop have a dominant strategy to set a high price, low price, or does it have no dominate strategy?
Check the Oligopoly Cheat Sheet
So, While looking at my cheat sheet,, I'm not really sure I like the definition I have included. My understanding is that a dominate strategy is that no matter the actions of the other participant the same action occurs. In essence,, we do the same thing no matter what the other player does. I'm not sure the understanding of this is clear in the definition above... (summer work)
No matter what Quick does,, Bread should go Low,,, therefore Bread has a dominate strategy to go low. Bread always goes low.
Answer - Bread has a dominate strategy to go low,, Quick should do the opposite of whatever Bread does., so it has no dominate strategy.
Answer - AP- One point is earned for stating that Breadbasket has a dominant strategy of setting a low price but Quicklunch does not have a dominant strategy.
(b) If the two shops don't cooperate on setting prices, what will be the profit for each shop.
Bread will choose Low, because $120 is the highest daily profit it can attain while not cooperating with Quick.
Quick will choose High, because $80 is the highest daily profit it can attain while not cooperating with Quick.
Answer - If there is no cooperation (setting prices) then their payoff will be from the left lower quadrant box,, $120 & $80.
Answer - AP - One point is earned for correctly identifying the profit for Breadbasket is $120 and the profit for Quicklunch is $80.
(c) The town (politician) government is concerned that food prices are to high (and there is an upcoming election). It (he/she) decides to give a daily subsidy (taxpayer monies) of $20 to any shop that chooses to set a low price for its food items. Redraw the payoff matrix under the new government scheme.
Make a new chart adding $20 to the firms that offer the low price.
Then make a new word chart to answer the following questions:
Once your charts are created,, then go and answer the questions.
(i) Would Quick choose to set a high price or a low price? Explain using values.
(ii) Would Bread's profits, decrease, increase or stay the same? Explain.