2.   (a) What are the advantages of the Herfindahl index over concentration ratios in measuring the degree of concentration in an industry? (b) What is the disadvantage of both?

8.   In what way does OPEC resemble a cartel? How successful is it?


  1. Problems: 1 and 5.


1.      Find the Herfindahl index for industry composed of (a) three firms – one with 70 percent of the market, and the other two with 20 and 10 percent of the market respectively; (b) one firm with a 50 percent share of the market and 10 other equal-sized firms; (c) 10 equal-sized firms.

5.   Starting with the reaction functions of duopolists A and B from Problem 4, find the Cournot solution algebraically.

Froeb and McCann's Chapter 10:


  1. Individual problems: 10-4.


10.4. Examine the U.S. Passenger airline industry using the Five Forces.  Is this an attractive industry? Why or why not?

Salvatore’s Chapter 11:


  1. Discussion Questions:12and 13.


12. How did the 1971 law that banned cigarette advertising on television solve the prisoners’ dilemma for cigarette producers?

13. (a) What is the meaning for tit-for-tat in game theory? (b) What conditions are usually required for tit-for-tat strategy to be the best strategy?

  1. Problems: 2, 6, and 10.


1.      From the following payoff matrix, where the payoffs that are profits or losses of the two firms, determine (a) whether firm A has a dominant strategy, (b) whether firm B has a dominant strategy, (c) the optimal strategy for each firm, and (d) the Nash equilibrium, if there is one.

6. Explain why the payoff matrix in Problem 1 indicates that firms A and B face the prisoners’ dilemma.

10. Given the following payoff matrix, (a) indicate the best strategy for each firm. (b) Why is the entry-deterrent threat by firm A to lower the price not credible to firm B? (c) What could firm A do to make its threat credible without building excess capacity?

Froeb and McCann's Chapter 15:

15-4. The following represents the potential outcomes of your first salary neogotiation after graduation:  Assuming this is a sequential move game with the employer moving first, indicate the most likely outcome.  Does the ability to move first give the employer an advantage? If so, how? As the employee, is there anything you could do to realize a higher payoff?

15-5. Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator who chooses the best proposal (effectively giving one side or the other $1 million).  Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $200,000) who is effective at preparing the proposal in the best light.  If neither hires lawyers or if both hire lawyers, each side can expect to win about half the time.  If only one side hires a lawyer, it can expect to win three-quarters of the time.


a.  Diagram this simultaneous move game.

b.   What is the Nash Equilibrium of the game?

c.   Would the sides want to ban lawyers?


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