Economics 101

PRINCIPLES OF MICROECONOMICS
Fall 2020
 
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Game Theory, Herfindahl Index, and Labor Market Assignment

The instructions for submitting this homework are the same as with previous assignments. When calculations are required, show the general formula for each variable. The homework is due by 10:00 AM on Friday, November 13.

1.  Katy and Taylor are singers who are having a public feud.  They both plan to release a new album at about the same time and have the opportunity to include a song that disses (disrespects) the other.  Given the expectations of their fans, the impact on their reputations, and other factors, the impact on each singer's profitability is given in the payoff matrix below:

  Taylor:  Diss Taylor:  Don't Diss
Katy:  Diss
K:  - $5 M
T:  - $2M
K:  $20 M
T:  $10 M
Katy:  Don't Diss
K:  $5 M
T:  $20 M
K:  $25 M
T:  $15 M

a.  What would be the outcome in this situation?  Explain.  What will be the outcome for each singer in terms of the profit made?

b.  What would be the outcome if Katy was able to release her album first?  Use a decision tree to illustrate this situation.

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2.  Consider an industry that has eleven firms with the following market shares:

25 15 10 10 10 5 5 5 5 5 5

a.  Calculate the Herfindahl-Hirschman Index for this industry.

b. The second largest firm decides to acquire one of the smallest firms in order to better compete with the largest firm. How will the Department of Justice and the Federal Trade Commission react to the proposed deal?

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