Name : Muhammad Reza Adi Wibowo

Class : EMBA 62
NIM : 29119375

Business Economics – Assignment 3A

Chapter 10 No. 2 – 4

2. Below as shown the payoff matrix stated in the question number 2

Firm B
Factor Produce Don’t Produce
Firm A
Don’t Produce (4,0) (4,2)
Produce (5,6) (7,4)

a. What would be the best strategy for each firm?

Based on the payoff matrix above, both 2 firms have different amount of matrix. Firm A have its
choice whether to produce or not. They have more advantages if they produce, If Firm A decide
to produce and Firm B decide to Produce they’ll get 5 For A and 6 for B. as if they produce and B
decide not to produce they’ll get 7 and B will get only 4. For firm A, they could choose to not
produce anything because it would still be beneficial for them compare to the competitor. As you
can see, Firm A will still be ahead of B whether the B produce or not. (A still got 4 for both B
produce or not). To consider which is the best strategy for A, they need also consider the
probability Firm B to choose their strategy. As you can see If B decide to not produce they will
suffer and got beaten by Firm A. B need to wait which strategy that A chose. If they produce and
A decide to not produce they got beaten by (4,0) but if they not produce anything and Firm A
decide to produce or not. They will still lost to them by (4,2) and (7,4).

Conclusion :

- For A, the best possible strategy for them in order to win against B is to Not Produce. Why?
Because, if they don’t produce anything. Firm B will get beaten whatever decision they make (4,0
and 4,2)
- For B, they definitely need to wait what decision that Firm A would like to choose. Best possible
scenario for them is to produce and hope firm A would produce also. This scenario would blown
up if Firm A decide to not produce. B will have lost with 4,0.

In order to get balance of both, Firm A producing and B producing would be good for both in terms of
profit, even B will get a little bit higher than A (5,6).
b. What is the entry-deterrent threat by firm A to not produce?

Basically, producing the goods will increase the profit of A (without considering B). As you could see
on the matrix, A will get 5 or 7 depends on the B of course but those two numbers is still higher than
if they choose to not produce anything (4 score for both decision that B made). This opportunity cost
that A should get whether B is producing or not, A will still get something good. Profit will still higher
than 4. It would be even better if B decide to not produce, A will get double benefits. First they will
get highest profit (7) and at the same time, beating B as the competitor (4) with high amount of
number. Other scenario, if A produce and B decide to produce also, A will get lost but not so much,
and would still be profitable compare to not produce. The opportunity to get higher profit is
something that could be the entry-deterrent to not produce by firm A.

c. What could Firm A do to make its threat credible?

There are several things that A could to make their threat credible. A already have much advantage
compare to B. by not produce anything, its already a credible threat for B. either B choose to produce
or not they would still be lost against A. Another scenario that A could do is to expand their producing
capacity in order to anticipate the “not produce” phase that they will sooner or later do to beat B as
their competitor.

Scenarios shown below:

- Firm A definitely would like to catch highest profit (Maximum payoff profit) opportunity, they’d
push to produce while B is not produce anything. But in other hand they will got beaten if B decide
to produce so it’s more to wait both of them to do decision strategy. From this we could see the
Firm B would choose to not produce, currently entry deterrence is credible and effective.

3. Matrix of the two firms with their price as shown on the table below:
Firm B
Price Low Price High Price
Firm A
Low Price (1,1) (3,-1)
High Price (-1,3) (2,2)

a. Whether firm A has a Dominant Strategy

Firm A have advantages to low their price, as you could see on the table they could get 3 paybacks
as if the B is deciding to choose high price for their product. But still will not lose if the B is choosing
the low price. High price actually not good for A, first the risk is just too high. If they have good
luck, they only get 2 paybacks while B is earning the same amount. It would be much worse if B
choose to apply the Low price. A will suffer a lot. Best strategy decision that A could choose is to
apply the low price while hoping B apply higher price.
 b. Whether firm B has a dominant strategy

Similar with firm A, B also has advantage to choose the low price compare to the High. Best
scenario if they decide to choose low price and A choose to apply higher price. They will get 3
paybacks while A suffering with -1. But B definitely will not think that way. Play safe is the best
decision that B could make. By choosing low price, they will get protected (even A choose low,
they both still get 1,1) so the best strategy for B is definitely choosing Low Price.

c. Optimal Strategy for each Firm

- For A
Best scenario for A will showed if they choose to apply low price while B decide to choose higher
price. A will get much benefits with (3,-1). Low price is optimal for A.

- For B
For B, best scenario would be similar with A, putting low price while hoping A would applied higher
price. It will lead them to advantages in terms of payback as much as 3 compare to -1 A. Low price
is optimal strategy for B.

- For A and B, Safety mode (Low Nash Equilibrium).

Both of them would consider the decision strategy of each other. When A decide to put low price,
and B would also put the low price. Will lead them to one exact the same or equal paybacks or
profit. I can say that its fair for anyone and its good for both of them.

- For A and B, Risk Taker (High Nash Equilibrium).

Let’s assume that both firms are risk taker. A and B put the same amount of price which is high.
Consumer don’t have any choice to denied both product. They would automatically buy the
product whether is A or B. so both firms have same advantages and better profits (2,2).

4. Payoff Matrix as shown on the table below:

Firm B
Price Low Price High Price
Firm A
Low Price (1,1) (3,-1)
High Price (-1,3) (4,2)

a. Whether firm A has a dominant strategy

In this matrix, we can see that every Firm A decision strategy would likely depend on strategy of
B. the best move that they could do is to choose low price rather than high price. Choosing low
price will protecting them from bigger loss if they failed in choosing ( B choose better strategy).
Let say A choose low price, so are B. they’ll get 1,1. Then B choose High price, would get even
better result (3,-1). In the other hand, A could get even better profits, but its dangerous at the
same time. The scenario would end very good for A if they put High price and B follows. They’ll
 get 4 and B get 2. Things will get ugly if they choose high while B is choosing low. A will suffer with
-1. Best possible decision strategy for A, I think it would be Low Price or High price but they need
to wait B to make the decisions.

b. Whether firm B has a dominant strategy

B have several options to choose, first if they’d choose low price. Things will get slow on them, let
say A decide to choose low price also, both firms will get 1,1 as paybacks, still beneficial. Situation
will get even better if A decide to choose High price. B will get 3 while A suffer with -1. Things will
get really disadvantage for B if they decide to choose higher price whatever decision that A make.
B will get beaten anyway. Best decision for B is definitely choosing Low price.

c. The Optimal Strategy for each Firm

- Optimal Strategy for Firm A

Firm A have 2 possibilities that lead them to the good profits. First scenario is to put low price;
they will get profit whatever B choose to do. Then, in order to get maximum profit that they could
get in this case. They should put High price, while B is choosing high price also. but the table will
turn if B decide to choose low price. A definitely will suffer. In order to get safe condition. Optimal
strategy for A is put the Low Price.

- Optimal Strategy for Firm B

Firm B don’t have many choice as A. but still they could win the matrix, by putting low price while
hoping A to try their best luck getting the 4 (increasing the price). Table will turn and B get 3 while
A suffer with -1. Best optimal strategy for B is definitely put Low Price.

d. The Nash Equilibrium?

As stated on the case, Firm A have some advantages whether its maximum profits or possible way
to get the profit even they need to wait B to decide. So there is no Nash Equilibrium. This happens
because Nash Equilibrium is only available when each player has chosen its optimal strategy given
the strategy of other player.
Chapter 11 (1 – 3)

1. Zydex, a pharmaceutical firm in India estimates the demand for two of its market A and B, for
pricing and output decisions with price discriminate. Following functions have been derived:

QA = 1600 - 80PA and QB = 2400 - 100PB

MRA = 20 – 0.025QA and
MRB = 24 – 0.02QB
MC = 4.5 + 0.005Q

a. Find the total Marginal Revenue Function?

MRA = 20 – 0.025QA

-0.025QA = MRA – 20 (Times (-40) in order to get 1Q)

QA = -40 MRA + 800

MRB = 24 – 0.02QB

-0.02QB = MRB – 24 (Times (-50) in order to get 1Q)

QB = - 50 MRB + 1200

QT = QA + Q B

= (-40 MRA + 800) + (-50 MRB + 1200)

= -90MRT + 2000

QT = -90MRT + 2000

90MRT = 2000 – QT

MRT = 22.22 – 0.0111 QT

 b. If the manager has a total of 650 units to sell, how should the 650 unit be
allocated to maximize total revenue.

MRT = 22.22 – 0.0111QT

MRT = 22.22 – 0.0111 (650)
MRT = $15

- Assuming MRA = MRB = $15,

QA = 800 - 40MRA
QA = 800 – 40 (15)
QA = 200

QB = 1200 - 50 MRB
QB = 1200 - 50 (15)
QB = 450

QA + QB = 200 + 450 = 650 (Total)

c. How many units should the manager produce and sell?

MRT = MC
22.22 – 0.0111QT = 4.5 + 0.005Q
17.72 = 0.016Q
Q = 1100 Units

d. How should the manager allocate the profit maximizing output between the two
markets?

QT = 1100 Units
MRT = 22.22 – 0.0111 (1100) = $10.

Assuming the Price both MRA & MRB is $10

QA = 800 - 40MRA
QA = 800 – 40 (10)
QA = 400

QB = 1200 - 50 MRB
QB = 1200 - 50 (10)
QB = 700
 e. What prices should the manager charge in the tow markets, if he would like to
discriminate?

- we can find P for both A and B from first equation QA & QB

From last calculation we have:

QA = 400
QB = 700

- Find P for Both

QA = 1600 - 80PA
400 = 1600 – 80PA
-1200 = -80PA
PA = $15

QB = 2000 - 100PB
700 = 2000 - 100PB
-1300 = -100 PB
PB = $13

The conclusion is PA is $15 and PB is $13

2. Hero, one of the leading bike firms in India, produces four types of bicycles (A, B, C, and F) in
declining order of sophistication, price, and profitability. In fact, in the sale of model F, the firm is
a perfect competitor. Draw a figure showing the best level of output and price of each type of
bicycle produced by the firm!

DA
DB DC

X axis is representing the Quantity and Y axis is representing the price. MRA shows the highest value of
the price (as stated on the questions) and increasing the quantity then declining as follows of MRB the
price not so significant and followed by increasing the quantity. Then MRC with the lowest price and
followed by increasing quantity above all.
3. The Monty Canning Company cans pineapples and sells the juice that results as a byproduct of
peeling and slicing pineapples. Each 10-pound basket of pineapples results in a 5-pound can of
pineapples and in a 5-quart can of pineapple juice. The demand and marginal revenue functions
that the firm faces for canned pineapple (product A) and pineapple juice (product B) are,
respectively,

QA = 80 - 5PA or PA = 16 – 0.2QA
MRA = 16 – 0.4QA
QB = 50 - 5PB or PB = 10 – 0.2QB and
MRB = 10 – 0.4QB
Two alternative marginal cost functions for the total pineapple “package” are respectively,
MC = 8 + 0.1Q or MC’ = 2Q/35

Determine graphically the best level of output and price of canned pineapple and pineapple
juice with each alternative MC function.

- First we need to define the Equation of MR total (MRT)

MRT = MRA + MRB

MRT = (16 – 0.4QA) + (10 – 0.4QB)
MRT = 26 – 0.8QT

- As stated before, we know that MRT = MC, Then;

MRT = MC
26 – 0.8QT = 8 + 0.1 Q
18 = 0.9 Q
Q = 20

MRA = 16 – 0.4 QA
MRA = 16 – 0.4(20)
MRA = 8

MRA > 0

MRB = 10 – 0.4QB
MRB = 10 – 0.4(20)
MRB = 2
MRB > 0

- Continue with the MRT = MC’

MRT = MC’
26 – 0.8QT = 2Q/35
 2Q = (26 – 0.8QT) x 35
2Q = 910 – 28Q
30Q = 910
Q = 30.33

- As follows, we go again with MRB = 0, To find the QB

MRB = 10 – 0.4QB
0 = 10 – 0.4QB
QB = 25

- However, MRB < 0 for QB = Q > 25, and MRT = MRA for Q > 25. Setting MRA equal to MC’, we have:
MRA = MC’
16 – 0.4QA = 2Q/35
560 - 14QA = 2Q
Q = 35
Calculation above showed us that Unit Product A has 35 Quantity in sales, compare to the B that
only has 25 unit of product. (company dispose 10 Units of product B to avoid sell it at MRB < 0)

- Price at sales of QA = 35,

PA = 16 – 0.2QA
PA = 16 – 0.2(35)
PA = $9

- Price at sales of QA = 35,

PB = 10 – 0.2QB
PB = 10 – 0.2(25)
PB = $5

- Optimal Output & Prices of Joint Product Fixed