The restaurant pricing game illustrated in Figure 5.1 defines customer demand functions for meals at

The restaurant pricing game illustrated in Figure 5.1
defines customer demand functions for meals at Xavier’s (Qx) and Yvonne’s (Qy)
as Qx = 44   Profits for each firm depend in addition
on their costs of serving each customer. Suppose that Yvonne’s is able to
reduce its costs to a mere $2 per customer by completely eliminating the wait
staff (customers pick up their orders at the counter, and a few remaining
employees bus the tables). Xavier’s continues to incur a cost of $8 per
customer.

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(a) Recalculate the best-response rules and the Nash
equilibrium prices for the two firms, given the change in the cost conditions.

(b) Graph the two best-response curves and describe the
differences between your graph and In particular, which curve has moved and by
how much? Explain why these changes occurred in the diagram.

 

 

 

 

 

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