EXAM 3: Homework/ Practice Problems

Both firms in a Cournot duopoly would enjoy higher profits if: A)the firms simultaneously reduced output below the Nash equilibrium level andone firm reduced output below the Cournot Nash equilibrium level, while theother firm continued to produce its Cournot Nash equilibrium output. B)each firm simultaneously increased output above the Nash equilibrium level. C)one firm reduced output below the Cournot Nash equilibrium level, while theother firm continued to produce its Cournot Nash equilibrium output. D)the firms simultaneously reduced output below the Nash equilibrium level. Chapter 9

D)the firms simultaneously reduced output below the Nash equilibrium level. ***Collusion

Refer to the normal-form game of price competition shown below. Firm B is the incumbent facing potential entry from its rival, firm A. Firm A's strategies consist of {entry, stay out}. Firm B's strategies are then {hard if entry; hard if stay out; soft if entry; soft if stay out}. Find the subgame Nash equilibrium to this game, if one exists. Chapter 10

Firm A plays {entry}; firm B plays {soft if entry}.

Which of the following is true for a Nash equilibrium of a two-player game? Chapter 10

Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy.

Which of the following is a profit-maximizing condition for a Cournot oligopolist?

MR = MC

Which of the following is NOT a type of market structure?

Monopolistic oligopoly

Collusion is: A) not possible when firms interact repeatedly forever. B) legal win the United States C) more likely in industries with a large number of firms D) None of the answers is correct Chapter 10

None of the answers is correct

In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to:

None of the answers is correct

The spirit of equating marginal cost with marginal revenue is NOT held by:

None of the answers is correct

The idea of charging two different groups of consumers two different prices is practiced in: Chapter 11

Price discrimination

Which group of policies aims at discouraging rivals from starting a price war? Chapter 11

Price matching and randomized pricing

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are:

Ql = 16 Qf = 8

Which of the following are quantity-setting oligopoly models?

Stackelberg and Cournot

Which of the following is NOT a condition for a firm to engage in price discrimination? Chapter 11

The consumers are sincere in revealing their true nature

Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute:

a Bertrand oligopoly

With linear demand and constant marginal cost, a Stackelberg leader's profits are ________ the follower.

greater than

A secure strategy is a strategy that: Chapter 10

guarantees the highest payoff given the worst possible scenario.

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should Chapter 11

have sold less output in the local market and more on the internet auction site.

Two firms produce different goods. Firm 1 has a positive-sloped reaction function. This can be explained best by:

heterogeneous product Bertrand oligopoly.

The special cost structure that is necessary for a firm to adopt a peak-load pricing policy is: Chapter 11

limited capacity

The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of Chapter 11

none of the above

A Nash equilibrium with a noncredible threat as a component is: Chapter 10

not a perfect equilibrium

If firms compete in a Cournot fashion, then each firm views the:

output of rivals as given

A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts. This is an example of: Chapter 11

price discrimination or peak-load pricing

It is easier to sustain tacit collusion in an infinitely repeated game if: Chapter 10

the present value of cheating is lower than collusion.

A local video store estimates its average customer's demand per year is Q = 7 − 2P, and it knows the marginal cost of each rental is $0.5. How much should the store charge for each rental if it engages in optimal two-part pricing? Chapter 11

$0.5

A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry?

$20

Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 − 2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of:

$512

Refer to the following game. ----low price high price low (10,9) (15,8) high (-10,7) (11,11) What are the Nash equilibrium strategies for firm A and firm B, respectively, in a one-shot game? Chapter 10

(low price, low price)

To engage in first-degree price discrimination, a firm must: Chapter 11

All of the answers are correct

Firm A has a higher marginal cost than firm B. They compete in a homogeneousproduct Cournot duopoly. Which of the following results will NOT occur? A)ProfitA < ProfitB B)PriceA < PriceB C)Revenue of firm A < Revenue of firm B D)QA < QB Chapter 9

B)PriceA < PriceB **One single price under Cournot

A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms coexist after the entry?

Below $20

Which firm would you expect to make the lowest profits, other things equal?

Bertrand oligopoly

Which of the following are price-setting oligopoly models?

Betrand

Firm 1 and firm 2 compete as a Cournot oligopoly. There is an increase in marginal cost for firm 1. Which of the following is NOT true?

Both firm 1's and firm 2's reaction functions are shifted.

Which of the following statements is true? The higher the average cost, the lower the profit-maximizing price B) The more elastic the demand, the higher the profit-maximizing markup C) The more elastic the demand, the lower the profit-maximizing markup. D) The higher the marginal cost, the lower the profit-maximizing price. Chapter 11

C) The more elastic the demand, the lower the profit-maximizing markup.

Two firms compete in a Stackelberg fashion. If firm 2 is the leader, then: A)firm 2 views the output of firm 1 as given. B)Both firm 1 views the output of firm 2 as given and firm 2 views the output offirm 1 as given are correct. C)firm 1 views the output of firm 2 as given. D)None of the answers is correct. Chapter 9

C)firm 1 views the output of firm 2 as given.

Which of the following is true? A)If there are only two firms in a market, prices must be above marginal cost. B)Both if there are only two firms in a market, prices must be above marginal cost and if there is only one firm in a market, prices must be above marginal cost arecorrect. C)If there is only one firm in a market, prices must be above marginal cost. D)None of the answers is correct. Chapter 9

D)None of the answers is correct. ***A) and B) if there are two firms in the market it can still be a Bertrand market so then P = MC

Game theory suggests that, in the absence of patents, the privately motivated innovation decisions of firms might lead to: Chapter 10

too little innovation

Both firms in a Cournot duopoly would experience lower profits if:

there was an increase in marginal production costs

You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Texans for a car wash is −4, while the elasticity of demand by non-Texans for a car wash is −6. If you charge Texans $20 for a car wash, how much should you charge a man with Oklahoma license plates for a car wash? Chapter 11

$18.00

During spring break, students have an elasticity of demand for a trip to Florida of −3. How much should an airline charge students for a ticket if the price it charges the general public is $360? Assume the general public has an elasticity of −2. Chapter 11

$270

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices. ----high price low price high (10,10) (5,-5) low (5,-5) (0,0) Suppose the game is infinitely repeated. Then the "best" the firms could do in a Nash equilibrium is to earn ________ per period. Chapter 10

(10, 10)

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices. ----high price low price high (10,10) (5,-5) low (5,-5) (0,0) Which of the following are Nash equilibrium payoffs in the one-shot game? Chapter 10

(10, 10)

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for pants. The firm selling suits faces no competition and has a marginal cost of zero. If the firm sells coats and pants for $25 each, but offers a bundle containing both a coat and pants for $150, how many bundles will the firm sell? Chapter 11

0

From a consumer's point of view, which type of oligopoly is most desirable? A)Bertrand B)Sweezy C)Stackelberg D)Cournot Chapter 9

A)Bertrand ***From consumers point of view the most favorable position is perfect competition where you pay the lowest price and consume the maximum

The market demand in a Bertrand duopoly is P = 10 − 3Q, and the marginal costs are $1. Fixed costs are zero for both firms. Which of the following statement(s) is/are true?

All of the statements associated with this question are correct

Which of the following is a factor(s) affecting collusion in an infinitely repeated pricing game? A) History B) Firm size C) Number of firms D) All of the statements associated with this question are correct Chapter 10

All of the statements associated with this question are correct

Refer to the normal-form game of bargaining shown below. - $0 $250 $500 $0 ($0,$0) ($0,$250) ($0,500) $250 ($250,$0) ($250,$250) (-10,-10) $500 ($500,$0) ($-10,$-10) (-10,-10) Suppose that management and the union are bargaining over how much of a $500 surplus to give to the union. It is assumed that the surplus can only be split into $250 increments. Furthermore, negotiations are set up such that management and the union must simultaneously and independently write down the amount of surplus to allocate to the union. The payoff structure to this one-shot bargaining game is listed in Figure 10-16. Find the Nash equilibrium(ia) to this game. Chapter 10

All of the statements associated with this question constitute Nash equilibria.

A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a:

Betrand oligopoly

If a product is perceived by consumers as homogeneous, which of the following strategies will work to induce brand loyalty? Chapter 11

Frequent buyer rebate programs

There are two existing firms in the market for computer chips. Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not. Innovation incurs a fixed setup cost of C, while increasing the revenue. However, once the new technology is adopted, another firm, B, can adopt it with a smaller setup cost of C/2. If A innovates and B does not, A earns $20 in revenuewhile B earns $0. If A innovates and B does likewise, both firms earn $15 in revenue. If neither firm innovates, both earn $5. Under what condition will firm B have an incentive to adopt if firm A adopts the innovation? Chapter 10

C < 30

Which of the following is NOT a feature of Sweezy oligopoly? A)Each firm believes that rivals will cut their prices in response to a pricereduction, but will not raise their prices in response to a price increase. B)Barriers to entry exist. C)The firms produce homogeneous products. D)There are few firms in the market serving many consumers. Chapter 9

C)The firms produce homogeneous products.

The Bertrand model of oligopoly reveals that: A)changes in marginal cost do not affect prices. B)capacity constraints are not important in determining market performance. C)perfectly competitive prices can arise in markets with only a few firms. D)All of the statements associated with this question are true. Chapter 9

C)perfectly competitive prices can arise in markets with only a few firms.

A market is NOT contestable if:

there are sunk costs

Refer to the normal-form game of price competition in the payoff matrix below. --------low price high price low price (0,0) (50,-10) high price (-10,50) (20,20) Suppose the game is infinitely repeated, and the interest rate is 10 percent. Both firms agree to charge a high price, provided no player has charged a low price in the past. If both firms stick to this agreement, then the present value of firm A's payoffs are: A) 550 B) 110 C) 330 D) 220 Chapter 10

D) 220

When firm 1 acts as a Stackelberg leader: A)Firm 1's profit is less than its profit if they compete in a Cournot fashion. B)Firm 2 produces the monopoly output. C)Firm 2 will earn more than if they compete in a Cournot fashion. D)None of the answers is correct. Chapter 9

D)None of the answers is correct. ***A) Not mandatory, if they are the leader they may be making more money. B) Firm to is the follower so it's impossible C) Not always correct. Firm 2 is the follower so its profit is suppose to godown in a Cournot model.

Ed just finished an empirical study of oligopoly. He found the following result: "In the examined industry, a firm's demand curve is such that other firms match price increases but do not match price reductions." What kind of oligopoly is the examined industry? A)Stackelberg model B)Sweezy model C)Cournot model D)None of the answers is correct. Chapter 9

D)None of the answers is correct. ***Exact opposite of Cournot

If your demand for renting videos is Q = 5 − 2P, should you purchase the annual membership from a video store that charges $0.5 per rental, plus an annual membership fee of $12? Chapter 11

Definitely no

Suppose that you are a manager. You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. --------work - shirk monitor (-1,1) (1,-1) dont monitor (1,-1) (-1,1) What should the manager do to solve the shirking problem? Chapter 10

Engage in "random" spot checks of the workplace.

Management and a labor union are bargaining over how much of a $50 surplus to give to the union. The $50 is divisible up to one cent. The players have one shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. Which of the following is NOT a Nash equilibrium? Chapter 10

Management requests $30 and the labor union accepts $10.

Which of the following is true? A) For a finitely repeated game, the game is played enough times to effectively punish cheaters, and therefore collusion is likely. B)A secure strategy is the optimal strategy for a player no matter what the opponent does. C) In an infinitely repeated game with a low interest rate, collusion is unlikely because the game unravels so that effective punishment cannot be used during any time period. D) None of the answers is correct Chapter 10

None of the answers is correct

The purpose of randomized pricing is to reduce: Chapter 11

both customer and competitor information about price.

Second-degree price discrimination is the practice of charging Chapter 11

different prices for different quantity blocks of the same good or service.

Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is: Chapter 10

for each firm to advertise

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is: Chapter 10

for neither firm to advertise

Game theory is best applied to the analysis of: Chapter 10

oligopoly

The maximum price that a consumer is willing to pay for each unit bought is the ________ price. Chapter 11

reservation