Thursday, May 3, 2012

Game theory

                                        ·         Driver 2
                                  Left                  Right
Driver 1     Left         0,0             -1000   -1000
                  Right      -1000, -1000           0,0

            Present in the game theory terms, dominant strategy is a strategy that results in the best outcome or highest payoff to a given player no matter what action or choice the other player makes (Farnham, 2010).
            Although, we can see in the example above that there isn’t a dominant strategy for either driver. It doesn’t matter which side it is as long as everyone chooses the same side. In the given example they are not able to communicate with each other, so neither one could be certain that the other driver would go to the left or right, however each one of the drive take the best direction for them. If the driver 1 does not go to the left, driver 2 should plan to go to the left. However if the driver 1 go to the left, driver 2 should not go; otherwise, everyone may get hurt. The same result hold for driver 1, given the strategy of driver 2.

             In the example above their choice is deciding which side of the road to drive on to the left or to the right. However, there is not a single strategy that each driver should pursue regardless of the action of the other driver. There is a unique Nash equilibrium because both drivers plan to take a direction and the drivers choose a strategy that is best for them given the action of what strategy the other driver’s choices (Farnham, 2010). On the example above, the drivers should choose the strategy that is better for them; given the assumption that the other driver is also choosing its best strategy. Once this equilibrium is reached, each driver would be worse off by changing its strategy.

            This game is cooperative because the players can earn higher payoffs if they work together and drive on the same side of the road.

In a monopolist scenario were to behave like a perfectly competitive firm (operating in the long run), determine its output.

            The monopoly model, as a market structure characterized by a single firm producing a product with no close substitutes, we can see that a monopolistic demand curve faces a down ward sloping because the single firm produces the entire output of the industry (Farnham, 2010). The curve that intersects the vertical axis at the same point as the demand curve and has a slope that is twice as steep as the demand curve is the marginal revenue curve (MR). Also we have the average total cost draw as U-shape curve, showing that these average cost first decrease, reach a minimum point and them increase.
            Given that the goal of the firm is to maximize profit, the firm in the figure above is producing output level I, where marginal revenue equals marginal cost; this is the standard rule for a profit maximization related in the perfectly competitive model. The difference here is that the marginal revenue curve is downward sloping and separated of the demand curve.
            In a monopolist firm through the entry of other firms into the industry, the profit would not be affected so much as in the perfectly competitive firm model where the profit would disappear which would lower the product price until it was equal to average total cost. These happened because in the monopolist model the existence of barriers difficult other firms to produce the similar product.
            According to Farnham, 2010 if the above monopolist were to behave like a perfectly competitive firm (operating in the long run) the monopolist will produce a smaller amount of output and charge a higher price than a competitive industry with the same demand and cost conditions. These happened because they both produce where marginal revenue equals to marginal cost, given the goal of profit maximization. However the monopolistic firm is a price –searcher while the perfect competitive firm is a price –taker means that the demand curve facing in the perfectly competitive firm is infinitely elastic or horizontal. In other hand the monopolistic must set the optimal price and produce a level of output at which price is greater than marginal cost.
            Therefore, in the same demand and cost conditions, the price will be higher and the output lower under monopoly than under perfect competition. The higher price results in the monopolist earning an economic profit compared with zero-economic profit of competition. Finally, higher prices in the monopolistic results in lower units purchased by the consumer.

Farnham, P. G. (2010) Economics for managers (2nd ed). Upper Saddle River, NJ:           Pearson Education Inc., Published as Prentice Hall.

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