Use the following example to answer questions 1 & 2: 1. Little Kona is a small...

Use the following example to answer questions 1 & 2:

1. Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Big Brew has enough market power to set either a high price or a low price. If Little Kona enters the market and Big Brew sets a high price, Kona would make $2 million profit while Brew would make $3 million, but if Big Brew sets a low price, Kona would lose $1 million and Brew would make $1 million. If Little Kona doesn't enter the market and Big Brew sets a high price, Kona would make no money and Brew would make $7 million, but if Big Brew sets a low price, Kona would make no money and Brew would make $2 million.

Does either player in this game have a dominant strategy?

	A.	Yes, both Little Kona and Big Brew have a dominant strategy.
	B.	Yes, only Little Kona has a dominant strategy.
	C.	Yes, only Big Brew has a dominant strategy.
	D.	No, neither Little Kona nor Big Brew have a dominant strategy.

QUESTION 2

2. What is the Nash equilibrium for this game?

	A.	Little Kona enters the market; Big Brew sets a high price
	B.	Little Kona enters the market; Big Brew sets a low price
	C.	Little Kona doesn't enter the market; Big Brew sets a high price
	D.	Little Kona doesn't enter the market; Big Brew sets a low price

QUESTION 3

3. Jennifer divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes large increase in the price of coffee in the United States. What effect would the income effect have on her purchasing of croissants? What about the substitution effect?

	A.	Increase. Increase.
	B.	Decrease. Increase.
	C.	Increase. Decrease.
	D.	Decrease. Decrease.

Expert Solution

Rahul Sunny answered 1 year ago

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