Reference no: EM133516306

Assignment:

1) In the small college town of Gowling Breen, Ohio, there are two almost identical pizza places: Tyrone's Pizza and Jade's Pizza. They only serve slices of cheese pizza. Both have very similar cost structures. There is a fixed cost of operating every month of $400 and there is a per unit variable cost of $0.50 per slice. Business relies on the steady demand from the local students of Gowling Breen State University (GBSU), who consume 900 slices per month (30 per day). Until now, students are evenly split, purchasing 15 slices a day from each pizza place (450 per month for each pizza place). Each place charges customers a price of $2.50 per slice.

a) Show that, initially, each pizza place is making a profit of $500 per month. Show work (and while, yes, you can probably show this in one line of math, I prefer that you set it up in a sort of "accounting style" where you break it out by revenues, fixed costs, variable costs, etc. in an organized manner, as if you were showing the numbers to a businessperson).

b) Now, suppose that GBSU introduces a new robot delivery system that the students prefer. If only one of the pizza places utilizes this service, they will win 2/3 of the market (i.e. they'll sell 600 slices per month while the other place only sells 300 per month). However, there is a $100 monthly fee to use this robot delivery service, paid by the pizza place. Suppose Tyrone uses the service while Jade does not. Calculate each of their monthly profits after this change. Show work.

c) If both pizza places utilize the robot delivery service, they'll go back to splitting the market 50%/50%, but both will pay the fee for using the robots. Calculate both firms' profits assuming they both use the robot service. Show work.

d) Now model this scenario as a simultaneous game, where each firm has two choices: use the robot service or don't use the robot service. Populate the following payoff matrix with the profits you calculated earlier (the following is an image, so you can't type directly into it, so it's probably easiest just to copy it out by hand).