ECON 661, Managerial Economics
Homework Assignment 5
Due Date: Friday, December 5
Please
answer all questions.
1. Suppose
Delta Airlines and United Airlines are the only carriers that serve the Miami
âCincinnati market. Ticket sales of both carriers are affected by their
advertising decisions.
The resulting
increases in sales for the two carriers are given in the following table:
Delta Airlines
United Airlines
Delta
Sales
($000âs)
United
Sales
($000âs)
Raise
Ad Spending
Raise
Ad Spending
400
300
Raise
Ad Spending
Leave
Ad Spending the Same
500
400
Leave
Ad Spending the Same
Raise
Ad Spending
300
800
Leave
Ad Spending the Same
Leave
Ad Spending the Same
200
500
Consider
that the two companies make their decisions simultaneously,
a. Construct a payoff table (by completing
the table below) to show the sales (in dollars) each
company would earn in each of the four decision situations (Do it in the manner it is done in the textbook does it). (10
pts)
Unitedâs
Choice
Deltaâs Choice
Raise Ad Spending
Leave Ad Spending the Same
Raise Ad Spending
Leave Ad Spending the Same
b. Does Delta
have a dominated strategy? Why or why not? If it has, identify the strategy. Does United have a dominated strategy? Why or
why not? If it has, identify the strategy. Always justify your answer. (15
pts)
c. Does Delta
have a dominant strategy? Why or why not? If it has, identify the
strategy. Does United have a dominant strategy?
Why or why not? If it has, identify the strategy. Always justify your answer. (15 pts)
d. Locate the
likely outcome of this advertising decision problem. Justify your answer.
(15 pts)
e. Is the
likely outcome a Nash equilibrium? Explain why or why not. (15
pts)
f. Is the
likely outcome strategically stable? Explain why or why not. (10 pts)
2. Suppose
United chooses and announces its ad expenditure (budget) before Delta does.
a. What is the Nash equilibrium in
this game? Explain how you arrived at your answer.
(Constructing a diagram (game tree)
that shows the structure and payoffs of the game in answering this question is recommended but not required) (10 pts)
b. Is there a first- mover advantage or
first-mover disadvantage in this game? Explain why?
(10 pts)
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