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Explain how payoff matrices used in game theory

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Reference no: EM13137082

1. If the four-firm concentration ratio of an industry is 75%, what does it mean?

2. Industry A is composed of five large firms and 100 small firms. The market shares of the five largest firms are, respectively, 30, 25, 20, 15, and 10. The 100 small firms together have the remaining market share. Calculate the Herfindahl-Hirshman index and determine what degree of concentration it exhibits. Would it be considered an oligopoly?

3. Explain how payoff matrices used in Game Theory illustrate mutual interdependence among firms in oligopolies. How can they be used to predict likely outcomes?

4. Explain, using the prisoners' dilemma analysis, why cooperation can be mutually beneficial, but if conditions prevent cooperation or collusion from happening, the outcome is worse for both parties.

5. What is the basis of the kinked-demand model? Explain the reason for the gap in the oligopolist's marginal-revenue curve. How does this model explain price rigidity in oligopoly?

6. Why is advertising prevalent in many oligopolies, especially when industry demand is inelastic? Illustrate your answer by assuming that with advertising, a firm's demand curve has price elasticity of -1.5 and without advertising, it is -2. If MC is $10, what is the difference in the profit-maximizing price?

Reference no: EM13137082

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