ECON 213 Problem Set 4 Name

ECON 213 Problem Set 4 Name:

Problem Set 4 is to be completed by 11:59 p.m. (ET) on Friday of Module/Week 8.

1. Movies are distributed in a variety of forms, not just first run theatrical presentations. What other ways are movies distributed? What are the different price points? Using this information, draw a fully labeled graph of the market for movies in which the distributor of the film price discriminates. (NOTE: This should not be perfect price discrimination.)

2. Assume the following game is played one time only. Based on the information in the payoff matrix, PNC Bank and Citizens Bank are considering an implicit collusive agreement on interest rates. Payoffs to the two firms are represented in terms of profits in thousands of dollars: Citizens Bank Collude: Raise Rates, Keep Rates. PNC Collude: Raise Rates (900, 800), Defect: Keep Rates (1100, 400). a. Does PNC have a dominant strategy? What is it? Does Citizens have a dominant strategy? What is it? b. Does the result of your answer change if the game is played an infinite number of times? Why or why not.

3. What is the profit maximizing output of the monopolist shown below? _____________ What price do they set? _______________________ What is the markup over cost? _______________________ Why will this price not fall? Output per day D MC MR ATC P r i c e 4.

4. Draw the cheese market for the United States showing the world price as the price for this market. How much cheese does the U.S. import at the world price? Now assume that the cheese lobby promotes and successfully gains a tariff on cheese. What happens to the price paid by cheese lovers in the U.S.? How does this change the value generated by the market? Why do you say this? Where does this appear in your graph?

Paper For Above instruction

The distribution of movies has expanded considerably beyond traditional theatrical releases, including formats such as digital downloads, streaming services, DVDs/Blu-ray, and cable or satellite broadcasts. Each distribution method appeals to different consumer preferences and price sensitivities, resulting in multiple price points. For instance, first-run theaters often charge the highest ticket prices, followed by rental or purchase fees for digital formats, subscriptions for streaming platforms, and discounted prices for DVD/Blu-ray sales or rentals (Shapiro & Varian, 1999). The varying price points reflect the different marginal costs, consumer willingness to pay, and pricing strategies employed by distributors.

Graphically, the market for movies under initial price discrimination can be modeled with a demand curve differentiated into segments corresponding to each distribution channel. In a scenario of imperfect price discrimination, a monopolist (or dominant distributor) segments consumers based on their willingness or ability to pay. The graph would include multiple demand curves or segments, with the monopolist setting different prices for each segment, capturing consumer surplus without perfect arbitrage (Varian, 1990). The diagram should illustrate the marginal revenue and marginal cost curves, with prices set above marginal cost in each segment to maximize profit, leading to three or more price points corresponding to first-run theaters, digital rentals, and streaming subscriptions.

In the context of game theory, the interest rate competition between PNC Bank and Citizens Bank demonstrates classic oligopolistic strategic interactions. The payoff matrix indicates two possible actions—raising or maintaining interest rates—and their associated profits. Analyzing whether each bank has a dominant strategy involves examining each firm's best response regardless of the other’s choice. PNC’s dominant strategy is to keep rates if that yields higher profit irrespective of Citizens’ decision, but this depends on the payoffs provided. Similarly, Citizens' dominant strategy is identified by comparing payoffs across the actions of PNC. If both banks aim to maximize joint profits, they might consider collusion; however, the incentives to defect due to individual gains from undercutting rivals often lead to suboptimal Nash equilibria. If the game repeats infinitely, the possibility of sustaining collusion depends on the threat of punishment strategies and the shadow of future interactions (Fudenberg & Tirole, 1991).

For the monopolist, profit maximization occurs where marginal revenue equals marginal cost (MR=MC). The corresponding output level, often labeled as Q, maximizes profit by producing where the difference between price and average total cost (ATC) is greatest, i.e., the markup. The profit-maximizing price is determined by projecting the demand curve at Q, and the markup over cost is the difference between this price and ATC at Q*. This price is sticky due to factors such as menu costs, contractual obligations, or market expectations that prevent prices from falling even if costs decrease or demand shifts (Mankiw, 2014).

In the U.S. cheese market, the domestic supply and demand intersect at the equilibrium price, which, when compared to the world price, determines the quantity imported. The world price acts as the competitive benchmark, with imports filling the gap between domestic production and consumption. When a tariff is implemented, the price paid by U.S. consumers rises to the new, higher level (world price + tariff). This results in a decrease in consumer surplus, a shift in market welfare, and the creation of deadweight loss, as some consumers are priced out of the market and less efficient producers are favored (Krugman, Obstfeld, & Melitz, 2015). On the graph, the impact of the tariff can be shown as an upward shift of the price line from the world price to the new, tariff-inclusive price, along with the reduction in quantities imported and changes in producer and consumer surplus.

References

• Fudenberg, D., & Tirole, J. (1991). Game Theory.MIT Press.
• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2015). International Economics (10th ed.). Pearson.
• Mankiw, N. G. (2014). Principles of Economics (7th ed.). Cengage Learning.
• Shapiro, C., & Varian, H. R. (1999). Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press.
• Varian, H. R. (1990). Microeconomic Analysis. W. W. Norton & Company.