Econ 306 Intermediate Microeconomics Summer 2019 Colorado State University Extra Credit Briggs Suppose the video game console market is dominated by two (anti-competitive) companies: Microsoft and...

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Econ 306 Intermediate Microeconomics Summer 2019 Colorado State University Extra Credit Briggs Suppose the video game console market is dominated by two (anti-competitive) companies: Microsoft and Sony (for this exercise assume that the other companies are so small the market is considered to only have two suppliers). The market demand for energy drinks is given by ?? = 8000 – 10P, where ?? is quantity demanded (?? = ?? + ??) and P is price. In addition, both video game console producers currently use the same technology for producing video game consoles which is given by ?? = 5[? .??.?]. They also have the same costs given by the function: C = 1,000,000 + 5?? + ? ?? ?? ?. Suppose that r = 10 and w = 15. A. Suppose the two dominant firms do not realize their market power. What is the market output, price and consumer and producer surplus? Also, what are the individual market supply quantities and profits? Should either of the firms shut down? How did you determine this? Draw a diagram for the market and individual firm. B. Suppose after the optimal quantity is determined (found in part A), the managers of Microsoft want to find the cost minimizing level of capital and labor that can be used given their current production process. Using the Lagrange multiplier method (look at the section starting on pg. 147 in your book), find the cost minimizing levels of inputs and calculate the average, marginal and total costs to the firm using the firm’s output function. Assume that fixed costs are $1,000,000 and each unit costs (1.65+ 1 20 ??) in raw materials. C. Suppose that the video game console producers realize that they are in effect a duopoly and therefore have market power. Also, they both are able to cut their fixed costs by $500,000 (from here on out). They are afforded the rare opportunity to collude without federal investigators knowing about the secret deal. What is the market output, price and consumer and producer surplus and deadweight loss? Also, what are the individual market supply quantities and profits? Draw a diagram of the market noting surpluses, profits and deadweight loss. D. Suppose that the video game console producers are unable to trust one another and therefore collusion breaks down. What is the market output, price and consumer and producer surplus? Also, what are the individual market supply quantities and profits? E. Suppose that Sony decides to make their move first in deciding how much to produce in the market. What is the market output, price and consumer and producer surplus? Also, what are the individual market supply quantities and profits? F. After calculating parts A-E give your recommendation to the management of Microsoft as to the best possible outcome of playing tit-for-tat in a finite and infinite game of prisoner’s dilemma using a payoff matrix. Also, note any dominant strategies of the firms and Nash equilibria (in pure and mixed strategies). Thoroughly explain how you came to your conclusion.