2007 Microeconomics Exam FRQ Question # 3
Watch me answer it here
(A) In which market
structure do these firms operate? Explain.
You should know by now that the market
structure is an oligopoly. There are only two firms (Rankin & Roadway) and
they are mutually interdependent.
**** That phrase should be memorized ((mutually
interdependent)) as this means that they depend on the actions of the other to
choose a course of action.****
(B) If Roadway
chooses an early departure, which departure time is better for Rankin wheels.
So before you start to answer this question you should make
a chart.
Here is the word chart for this problem, if you do it the
same way every time you will get it correct.
Answer – If Roadway chooses an early departure then Rankin should go early.
(C) Identify the
dominant strategy for Roadway.
Notice the shaded area for Roadway. No matter what Rankin
does Roadway will/should go Early. This means that Roadway has a dominant strategy.
(D) Is choosing an
early departure a dominant strategy for Rankin wheels? Explain.
NO, an early strategy is not a dominant strategy for Rankin
because if Roadway goes late then Rankin should go late because $800 > $650.
(E) If both firms know all of the information in the payoff
matrix, but do not cooperate, what
will be Rankin wheels daily profit?
Understand that Roadway is going to go early no matter, so
then Rankin will choose early also as it has the highest payoff of $900. For
this question, even if they had cooperated they still would have chosen the
same quadrant.
Welker does it so well.