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Managerial Economics and Decision Sciences

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Added on  2021-02-22

Managerial Economics and Decision Sciences

   Added on 2021-02-22

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Managerial Economics and Decision Sciences A19 ADipBA01 A3 CW NP02A170050 Page | 1 Module Code: ADipBA01 Module Title: Managerial Economics and Decision Sciences Module Leader: Miss Kanittha Tambunlertchai (PhD, Cambridge) Module lecturer: Mrs. Samjhana Karki Coursework Type: Individual Submitted to: RTE Department Student Name: Naima Subba Student ID: NP02A170050 Date of submission: 15 June, 2020
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Managerial Economics and Decision Sciences A19 ADipBA01 A3 CW NP02A170050 Page | 2 SECTION-A Case Study 1. Huawei and Xiaomi have a large inventory of mid-range smart phone that they would like to sell before a new generation of faster, cheaper mid-range smart phone is introduced. The dilemma that each competitor facing is whether to advertise a “discounted” sale on the discontinued items or not. This is a one-shot game, and both firms seek to maximize profits. A. What is the dominant strategy for each firm? Are these also secure strategies? A dominant strategy is the strategy that gives the best results for the agent while decision-making process, regardless of the strategy chosen by the other agent in the game. To find out the dominant strategy of each firm, both Huawei and Xiaomi should be undergoing through prisoner’s dilemma. Therefore, assuming that both firm’s payoffs depend upon the decision of one another;For Huawei, If Xiaomi advertises, - Huawei will earn profit of $6 million, if it chooses to advertise. - Huawei will earn profit of $2 million, if it chooses to not advertise. If Xiaomi does not advertise, - Huawei will earn profit of $15 million, if it chooses to advertise. - Huawei will earn profit of $11 million, if it chooses to not advertise. Therefore, whatever Xiaomi chooses, Huawei’s best interest is always to choose to advertise”. So, the dominant strategy for Huawei is to advertise a “discounted” sale on the discontinued items regardless of what Xiaomi chooses.For Xiaomi, If Huawei advertises, - Xiaomi will earn profit of $6 million, if it chooses to advertise. - Xiaomi will earn profit of $2 million, if it chooses to not advertise.
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Managerial Economics and Decision Sciences A19 ADipBA01 A3 CW NP02A170050 Page | 3 If Huawei does not advertise, - Xiaomi will earn profit of $15 million, if it chooses to advertise. - Xiaomi will earn profit of $11 million, if it chooses to not advertise. Therefore, whatever Huawei chooses, Xiaomi’s best interest is always to choose to advertise”. So, the dominant strategy for Xiaomi is to advertise a “discounted” sale on the discounted items regardless of what Huawei chooses. Yes, the dominant strategy for each firm i.e. to advertise, is also the secure strategies for each firm. Since this is a one-shot game, no firm will be able to know one another’s strategy. B. What is the Nash Equilibrium?The choice to “advertise” for both Xiaomi and Huawei is a Nash equilibrium. This is because, in Nash equilibrium each competitor chooses the best strategy possible and given the strategy of each competitor, neither can improve the individual payoffs by changing their strategies. C. Would collusion work in this case? Collusion is an informal agreement among the firms in the market to collectively produce a fixed level of output. Given the situation; No, collusion will not work in this case. Since it is only a one-shot game, there cannot be interaction between the firms, so collusion does not occur in such case.Case study 2. Oxy Maxx, Inc., has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses. However, the company faces potentially fierce competition from a host of new competitors as some important basic patents expire during the coming year. Unless the company
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Managerial Economics and Decision Sciences A19 ADipBA01 A3 CW NP02A170050 Page | 4 is able to thwart such competition, severe downward pressure on prices and profit margins is anticipated. A. Use Oxy Maxx’s current price, output, and total cost data to complete the table: Price ($) Monthly output ($million) Total revenue ($ million) Marginal revenue ($ million) Total cost ($ million) Marginal cost ($ million) Average cost ($ million) Total profit ($ million) 20 0 0 0 0 0 0 0 19 1 19 19 12 12 12 7 18 2 36 17 27 15 13.5 9 17 3 51 15 42 15 14 9 16 4 64 13 58 16 14.5 6 15 5 75 11 75 17 15 0 14 6 84 9 84 9 14 0 13 7 91 7 92 8 13.14 -1 12 8 96 5 96 4 12 0 11 9 99 3 99 3 11 0 10 10 100 1 105 6 10.5 -5 (Note: Total Costs includes a risk-adjusted normal rate of return) - Total revenue= price * monthly output - Marginal revenue= change in total revenue/change in monthly output - Marginal cost= change in total cost/change in monthly output - Average cost= total cost / output- Total profit= Total Revenue-Total CostB. If cost conditions remain constant, what is the monopolistically competitive high price/low-output long-run equilibrium in this industry? What are industry profits? A market structure is a monopolistic competition when many firms offer products or services that are similar, but not perfect substitutes. Some of the key characteristics of monopolistic competition are:
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