EBE2043 MANAGERIAL ECONOMICS

GROUP ASSIGNMENT
ANSWER ALL ( 70 MARKS)
Game Theory
QUESTION 1 ( 15 MARKS)
. Suppose a new low cost discount firm must decide in advance between
introducing LARGE or SMALL capacity in a licensed cable TV market where
the incumbent then will decide on a HIGH or MATCHING pricing response. If
the following table describes the payoffs from various combinations of these
strategies, what capacity will the new entrant choose and why? Show the
Iextensive form.

With LARGE
Capacity

With SMALL
Capacity

Incumbent
Profit

Entrant
Profit

HIGH Prices

$50

$10

MATCHING
Prices

$70

$3

HIGH Prices

$90

$5

MATCHING
Prices

$60

$1

QUESTION 2 (15 MARKS)

I) Dominant Strategy: a strategy or action that always provides the best
outcome no matter what decision rivals make. One famous example of the
dominant strategy is Prisoners Dilemma:
Suppose a crime is committed and two suspects, Bill and Jane are
apprehended and questioned by the police. The police do not have
evidence to convict them unless one of them confesses. So the police
separate them and make each one an offer that is known to the other.
Give example of the real world application for Prisoners Dilemma in detail
( 10 MARKS)

EBE2043 MANAGERIAL ECONOMICS

II) The following matrix shows the payoffs for an advertising game between
Coke and Pepsi. The firm can choose to advertise or not to advertise.
Numbers in the matrix represent profits; the first number in each cell is the
payoff to Coke. (Numbers in millions)
( 10 MARKS)

Coke(rows)/Pepsi(c Advertise
olumns)
Advertise
(10,10)
Dont Advertise
(-50,500)

Dont
Advertise
(500,-50)
(100,100)

a) Explain why this would be described as a Prisoners Dilemma game

(2marks)
b) Explain the probable outcome of this game
(3marks)
QUESTION 3 ( 10 MARKS)
Consider the information below when answering the following question(s):

Harry's
SIX
Harry's
SEVEN

PIZZA SPINNERS' CHOICE

SIX
SEVEN
$550
$750
$700
$100
$120
$640

$370
$350

(Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in
the lower left go to Harry's).
1. In choosing whether to deliver to six or seven neighborhoods, Pizza Spinners
has to take into account not only its own costs, but also the delivery area
response of its competitor Harry's Pizzeria. If the payoffs per week from
delivering in six and seven neighborhoods are as displayed in Exhibit 13-1,
what will Pizza Spinner's choose and why?
( 5 MARKS)

EBE2043 MANAGERIAL ECONOMICS

2. In choosing whether to deliver to six or seven neighborhoods, Harry's Pizzeria

has to take into account not only its own costs but the delivery area response
of its competitor Pizza Spinners. If the payoffs per week from delivering in six
and seven neighborhoods are as displayed in Exhibit 13-1, what will Harry's
Pizzeria choose and why?
( 5 MARKS)
QUESTION 4 (10MARKS)_
Toyota Motor Corp., like most major multinational corporations, enjoys easy
access to
world financial markets. Explain why the NPV approach is the most
appropriate tool for
Toyotas investment project selection process.
(10 MARKS)

QUESTION 5 (20MARKS)_
Suppose that your college roommate has approached you with an
opportunity to lend $25,000 to her fledgling home healthcare business. The
business, called Home Health Care, Inc., plans to offer home infusion therapy
and monitored in-the-home healthcare services to surgery patients in the
Birmingham, Alabama, area. Funds would be used to lease a delivery vehicle,
purchase
supplies, and provide working capital. Terms of the proposal are that you
would receive $5,000 at the end of each year in interest with the full $25,000
to be repaid at the end of a ten-year period.
( 20 MARKS)
A. Assuming a 10% required rate of return, calculate the present value of
cash flows
and the net present value of the proposed investment.
( 7 MARKS)
B. Based on this same interest rate assumption, calculate the cumulative
cash flow of
the proposed investment for each period in both nominal and present-value
terms. ( 8 MARKS)
C. What is the payback period in both nominal and present-value terms?
( 3MARKS)
D. What is the difference between the nominal and present-value payback
period?

EBE2043 MANAGERIAL ECONOMICS

Can the present-value payback period ever be shorter than the nominal
payback
period?
( 2 MARKS)