Essentials of Economics
4th Edition
ISBN: 9781464186653
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Chapter P5, Problem 1.2BC
To determine
Economic incentive facing John Hume with those facing a Kenyan rancher.
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Given the following petroleum tax details, calculate the marginal tax rate and explain
its significance:
Total Revenue: $500 million
Cost of Operations: $200 million
Tax Rate: 40%
Additional Royalty: 5%
Profit-Based Tax: 10%
Use a game tree to illustrate why an aircraft manufacturer may price below the current marginal cost in the short run if it has a steep learning curve.
(Hint:
Show that learning by doing lowers its cost in the second period.)
Part 2
Assume for simplicity the game tree is illustrated in the figure to the right. Pricing below marginal cost reduces profits but gives the incumbent a cost advantage over potential rivals. What is the subgame perfect Nash equilibrium?
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Chapter P5 Solutions
Essentials of Economics
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