Answer Happy

a Question 2 (a) Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price: Big Brew High price Low Price Brew makes S3 million Brew makes $1 million Enter ttle Kona makes zero Brew makes $7 million Kona loses $1 million Brew makes $2 million ona Don't Enter Kona makes zero Kona makes zero (i) Does Big Brew have a dominant strategy? How about Little Kona? (6 marks) (ii) What is the Nash equilibrium? (3 marks) (iii) Big Brew threatens Little Kona by saying, "If you enter, we're going to set a low price, so you better stay out.” Do you think Little Kona should believe the threat? Why or why not? (6 marks) (b) Should the government try to prevent a merger that would enable the resultant firm to produce at a more efficient scale of production? (10 marks) Question 3 (a). Consider a McDonald's restaurant that sells hamburgers in a small town alongside a few other fast-food restaurants. (i) Draw the marginal cost, average total cost, demand, and marginal revenue curves for the McDonald's restaurant, assuming the profit-maximizing price is greater than the average total cost. Show the restaurant's profit. (5 marks) (ii) Draw a graph to explain what might happen in this situation to bring about a long-run equilibrium. (6 marks)