AP® Microeconomics · Free response

Two bike-share firms in a payoff matrix, then one firm's short-run cost curves

write it first, then score yourself point by point

Long free-response question · four-function calculator · 10 points · about 25 minutes

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The question

Name: ______________________   Date: ____________   Two bike-share firms in a payoff matrix, then one firm's short-run cost curves (10 points)

Pedalwise and Sunpath (invented) are the only bike-share firms in a city. Each decides, at the same time and without talking to the other, whether to expand into a new district (Expand) or stay in its current districts (Stay). The matrix shows each firm's monthly profit in thousands of dollars; in each cell Pedalwise's payoff is listed first. Both firms know the matrix.

  1. (A) Identify each firm's dominant strategy, if it has one, and every Nash equilibrium. [2 points]

  2. (B) Identify the pair of strategies that gives the two firms the largest combined profit. [1 point]

  3. (C) Explain, using the numbers in the matrix, why the pair of strategies in part B is not a Nash equilibrium. [1 point]

  4. (D) Pedalwise's costs: draw a correctly labeled graph of Pedalwise's short-run marginal cost (MC), average variable cost (AVC) and average total cost (ATC) curves, and show the number of rides at which ATC is at its minimum, labeled X. [2 points]

  5. (E) Explain why the MC curve crosses the ATC curve at the lowest point of ATC. [1 point]

  6. (F(i)) Pedalwise pays its mechanics for each repair, and the pay per repair rises. Show the effect on your graph by shifting the curve or curves that change. [1 point]

  7. (F(ii)) Explain why Pedalwise's average fixed cost does not change when the pay per repair rises. [1 point]

  8. (G) Identify what happens to the vertical gap between ATC and AVC as Pedalwise provides more rides, and explain. [1 point]