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ECO2007 Tutorial 6
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- University Of Cape Town (UCT)
ECO2007 Tutorial 6
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ECO2007STutorial 6
Due: Friday 14 October 17:00
Please submit under Vula Assignments in PDF format
Tutorial compiled by: Robert Hill
Tutorial covers: Module 8
Total marks: 36
Question 1: Price wars are no joke … [16 marks]
Fred and George Weasley own Weasleys’ Wizard Wheezes – a joke shop in Diagon Alley.
However, there is another joke shop on the street: a store called Gambol & Japes. Both stores sell
similar merchandise and are competing for market share. Assume that a new type of Nosebleed
Nougat is released, and that both Weasleys’ Wizard Wheezes and Gambol & Japes must decide
how they want to market this product. They can either choose to run a launch special and offer
discounted prices on this new product (DP), or they can choose to mark up their prices and
maximise revenue for themselves (MR). The interaction between the two stores is represented in
strategic form below, where the payoffs represent monthly profits in thousands of Galleons (the
wizarding currency).
Gambol & Japes
DP MR
Weasleys’ Wizard DP 75, 75 150, 25
Wheezes MR 25, 150 120, 120
1.1 What is/are the Nash equilibrium/equilibria of this game? What type of game are the two
stores playing? [2 marks]
1.2 Assume that the manufacturer of Nosebleed Nougat indicates that they plan on releasing a
new product every month for the next 18 months. If Weasleys’ Wizard Wheezes and Gambol
& Japes interact according to the normal form game above each time a new product is released,
will they be able to maintain cooperation over the course of their interaction? Why or why
not? [4 marks]
1.3 Imagine instead that the interaction will now repeat every month forever, but that both stores
adopt the Grim conditional strategy: choose MR if their opponent chooses MR, but choose
DP forever if their opponent chooses DP. Calculate the interest rate, r, that would make it
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