Question 1:
A town is dominated by two banks; Bank of Manitoba (BOM) and Scottsdale Chartered Bank (SCB). Suppose that the banks are contemplating reducing the number of Automated Teller Machines (ATMs) they operate. The implications of such an action would be that (a) Banks would reduce operating costs (b) they would lose some customers because their services become less accessible. If both firms reduce the number ATMs they would gain annual profits of $2 Billion, if only one did so, the ATM reducing firm would earn annual profits of $1.5 Billion and the other would earn $5Billion, if they both decide against the policy them they would each earn $1Billlion per year.
a. Represent this game in
i. Normal Form
ii. Extensive Form
b. Assuming that both firms make their decisions simultaneously, find
i. Equilibrium in dominant strategies
ii. Nash equilibrium in pure strategies
c. Suppose that either firm is not sure of the other firm's rationality, what would be the outcome of the game?
d. If BOM decides to act first; what would be the equilibrium out come (SGPNE)?
Question 2:
The Publicity agents for the Winterpeg Blue Strikers announce the signing of a new quarterback, Shane Doe. They say that the contract is worth CAD lm and lill be paid in 20 installments of $50,000 per year starting one year from now and with one new installment each for the next 20 years. The contract contains a clause that guarantees he will get all the money even if he is injured and cannot play a single game. Sports writers declare that Shane has become an" instant millionaire".
a. Shane's half sister Xian who majored in economics explains to Shane that he is not a millionaire, and that in fact his contact is worth less than half a million dollars. Explain why this may be so.
b. Suppose the interest rate is 10% and is expected to remain 10% forever. How much would it cost the team for buy Shane a perpetuity that would pay him $20,000 per year forever starting from year 1?
c. How much would it cost to buy perpetuity of $50,000?
Question 3: Explain the idea behind the following concepts
a. Backward bending labor supply curve
b. Efficiency wage
c. Derived demand
d. Kinked demand curve
e. Nash Equilibrium and Sub Game Perfect Equilibrium