Suppose that a regulated industry experiences an increase in the price of inputs used to produce the good. Which of the following statements is TRUE?
A) Under both the capture theory and the share-the-gains, share-the-pain theory profits will decrease.
B) An increase in price will occur quicker in the share-the gains, share-the-pain theory than the capture theory.
C) An increase in price will occur quicker in the capture theory than the share-the-gains, share-the-pain theory.
D) In the capture theory there will be an increase in price but not in the share-the-gains, share-the-pain theory.
Answer: C
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Consider the following entry game: Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard," firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft,", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies?
A. (not enter, hard) and (enter, soft) B. (enter, hard) and (not enter, soft) C. (enter, soft) and (not enter, soft) D. (enter, hard) and (not enter, hard)
Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times, and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account. If the interest rate on checking accounts is 4% and the interest rate on bonds is 9%, how much does Mr. Pierpont keep in his checking account?
A. $130,000 B. $50,000 C. $70,000 D. $150,000