Managerial Economics

Indian School of Business

Term 1, 2017-18
PRACTICE PROBLEMS FROM SESSION 9

1. Two soap producers, the Froth Company and the Maison Company, can
stress either newspapers or magazines in their forthcoming advertising campaigns.
The payoff matrix is as follows, with each cell representing (Froth's profits, Maison's
profits).
Maison Company

Newspapers Magazines

€7 mm, €8
Newspapers €8 mm, €9 mm
Company

mm
Froth

€8 mm, €7
Magazines €9 mm, €8 mm
mm

a) Is there a dominant strategy for each firm? If so, what is it?

b) What will be the profit of each firm?
c) Is this game an example of the prisoner's dilemma?

2. The Ulysses Corp and the Xenophon Company are the only producers of a
very sophisticated type of camera. They each can engage in either a high or low
level of advertising in trade journals. The payoff matrix is as follows:
Xenophon Co.

Low level High level

Low level $12 mm, $13 mm $11 mm, $12 mm

Ulysses
Corp.

High level $13 mm, $12 mm $12 mm, $11 mm

a) Will Ulysses engage in a high or a low level of advertising in trade journals?

b) Will Xenophon engage in a high or a low level of advertising in trade
journals?
c) Is there a dominant strategy for each firm?
3. Two rival bookstores are trying to locate in one of two locations. The locations
are near to each other. Each would like to avoid a bidding war against one another
since that will drive up each of their rents. Payoffs are given in the following table:
Borders

West End Downtown

West End 10, 10 60,40

Barnes &
Nobles

Downtown 25, 55 20, 20

Does either player have an incentive to bid higher for a location, and if so, by how
much?

4. Watch the following scene from the movie Princess Bride. Formulate the
problem as articulated by Vizzini (the Sicilian). Then solve for the Nash
equilibrium.1

The wine is from the “Bottle of Wits".
1