Managerial Economics and Decision Sciences Assignment

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Managerial Economics and Decision SciencesA19 ADipBA01 A3 CW NP02A170050 Page | 1Module Code:ADipBA01Module Title:Managerial Economics and Decision SciencesModule Leader:Miss Kanittha Tambunlertchai (PhD, Cambridge)Module lecturer:Mrs. Samjhana KarkiCoursework Type:IndividualSubmitted to:RTE DepartmentStudent Name:Naima SubbaStudent ID:NP02A170050Date of submission:15 June, 2020
Managerial Economics and Decision SciencesA19 ADipBA01 A3 CW NP02A170050 Page | 2SECTION-ACase Study1.Huawei and Xiaomi have a large inventory of mid-range smart phone thatthey would like to sell before a new generation of faster, cheaper mid-rangesmart phone is introduced. The dilemma that each competitor facing iswhether 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. Whatisthedominantstrategyforeachfirm?Arethesealsosecurestrategies?A dominant strategy is the strategy that gives the best results for the agent whiledecision-making process, regardless of the strategy chosen by the other agent inthe game. To find out the dominant strategy of each firm, both Huawei and Xiaomishould be undergoing through prisoner’s dilemma. Therefore, assuming that bothfirm’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 toadvertise”. So, the dominant strategy for Huawei is to advertise a “discounted” saleon 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.
Managerial Economics and Decision SciencesA19 ADipBA01 A3 CW NP02A170050 Page | 3If Huawei does not advertise,-Xiaomi will earn profit of $15 million, if it chooses to advertise.-Xiaomi will earn profit of $11 million, if it chooses to not advertise.Therefore, whatever Huawei chooses, Xiaomi’s best interest is always to choose toadvertise”. So, the dominant strategy for Xiaomi is to advertise a “discounted” sale onthe discounted items regardless of what Huawei chooses.Yes, the dominant strategy for each firm i.e. to advertise, is also the secure strategiesfor each firm. Since this is a one-shot game, no firm will be able to know one another’sstrategy.B. What is the Nash Equilibrium?The choice to “advertise” for both Xiaomi and Huawei is a Nash equilibrium. Thisis because, in Nash equilibrium each competitor chooses the best strategy possibleand given the strategy of each competitor, neither can improve the individualpayoffs by changing their strategies.C. Would collusion work in this case?Collusion is an informal agreement among the firms in the market to collectivelyproduce a fixed level of output. Given the situation; No, collusion will not work inthis case. Since it is only a one-shot game, there cannot be interaction betweenthe firms, so collusion does not occur in such case.Case study2.Oxy Maxx, Inc., has enjoyed rapid growth in sales and high operating profitson its innovative extended-wear soft contact lenses. However, the companyfaces potentially fierce competition from a host of new competitors as someimportant basic patents expire during the coming year. Unless the company
Managerial Economics and Decision SciencesA19 ADipBA01 A3 CW NP02A170050 Page | 4is able to thwart such competition, severe downward pressure on prices andprofit margins is anticipated.A. Use Oxy Maxx’s current price, output, and total cost data to complete thetable:Price($)Monthlyoutput($million)Totalrevenue($ million)Marginalrevenue($ million)Total cost($ million)Marginalcost($ million)Averagecost($ million)Total profit($ million)200000000191191912121271823617271513.59173511542151491646413581614.561557511751715014684984914013791792813.14-112896596412011999399311010101001105610.5-5(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 competitivehigh price/low-output long-run equilibrium in this industry? What are industryprofits?A market structure is a monopolistic competition when many firms offer productsorservicesthataresimilar,butnotperfectsubstitutes.Someofthekeycharacteristics of monopolistic competition are:
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