BE401 Exam3 (Ch.10&11)

Which of the following is NOT true?

A normal-form game is most useful for sequential-move games.

Which of the following are important determinants of collusion in pricing games?

All of the statements are correct.

Which of the following pricing policies compensate customers if the firm fails to provide the best price in the market?

Beat-or-pay.

The purpose of randomized pricing is to reduce:

Both customer and competitor information about price.

Collusion is:

None of the answers are correct.

A Nash equilibrium with a non-credible threat as a component is:

Not a perfect equilibrium.

Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so?

Senior citizens have a more elastic demand for movies than ordinary citizens.

A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is:

Economies of scope.

Which of the following statements about a price-matching strategy is INCORRECT?

It requires that the firms can monitor their rival's prices.

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

Limited capacity.

Which of the following pricing strategies is NOT used in markets with special cost and demand structures?

Low-price guarantees

Which of the following is true for perfect competition but not true for monopolistic competition and monopoly?

P=MC

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

The consumers are sincere in revealing their true natures.

One of the conditions under which price discrimination is profitable is: A. ability to identify consumer types. B. inability to resell the good. C. differences in demand elasticities. D. All of the statements associated with this question are correct.

All statements are correct.

To engage in first-degree price discrimination, a firm must: A. be able to set P > MC. B. know each consumer's maximum willingness to pay. C. prevent low-value consumers from reselling to high-value consumers. D. All of the answers are correct.

All statements are correct.

A coordination problem arises whenever there:

Are multiple Nash equilibria

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

Frequent buyer rebate programs.

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

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

When analyzing the behavior of oligopolists, which of the following is crucial for the success of game theoretic analysis?

Make sure the problem you are considering is of a one-shot or repeated, nature, and you model it accordingly because the order in which players make decisions is important.

Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?

Marginal cost pricing

51. If the profit-maximizing markup factor in a 10-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand? A. -1.0 B. -1.2 C. -2.0 D. None of the statements is correct.

None of the answers are correct.

Which of the following conditions are necessary for the existence of a Nash equilibrium? A. The existence of dominant strategies for both players. B. The existence of a dominant strategy for one player and the existence of a secure strategy for another player. C. The existence of a secure strategy for both players. D. None of the answers is correct.

None of the answers are correct.

Which of the following is a true statement about the process of cross-subsidization, given that a firm is selling two products?

The firm needs to cost complementarities in the production of the two goods.

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

The interest rate is lower.

Which of the following is a correct statement?

The more elastic the demand, the higher the profit-maximizing markup.

Which of the following statements is true?

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

Which of the following is NOT true?

The notion of credible threats makes more sense in normal-form representations than in extensive form representations of a game.

It's easier to sustain tacit collusion in an infinitely repeated game if:

The present value of cheating is lower than collusion.

A finitely repeated game differs from an infinitely repeated game in that:

There is an end-of-period problem for the former.

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

Too little innovation.

To circumvent the problem of double marginalization:

Transfer prices must be set that maximize the overall vale of the firm rather than the profits of the upstream division.

to avoid the problem of double marginalization:

Transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.

Which of the following pricing strategies is NOT used in markets characterized by intense price competition?

Transfer pricing.

Which group of policies aims at extracting all consumer surplus?

Two-part pricing and commodity bundling.

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 charges $100 for a suit (which includes both pants and a coat), the firm will sell a suit to:

Type A consumers and type B consumers.

Which of the following is NOT an important determinant of collusion in pricing games?

the importance and magnitude of the item in a consumers budget.

When two or more divisions mark up prices in excess of marginal cost:

Double marginalization occurs.

A secure strategy is a strategy that:

Guarantees the highest payoff given the worst possible scenario.

Second-degree price discrimination:

Is the practice of posting a discrete schedule of declining prices for different ranges of quantities.

Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?

Marginal cost pricing.

A new firm successfully enters a three-firm Cournot oligopoly without changing the demand and cost structures. The new price becomes:

Unknown for lack of other information.

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?

$0.5

A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of -2.5. Which price should it charge to optimize its profits?

$10 per unit/

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?

$18.00.

Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing, the most profits the firm will earn is:

$25

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.

$270.

You are the manager of a Mom and Pop store that can buy milk from a supplier at $2.00 per gallon. If you believe the elasticity of demand for milk by customers at your store is -3, then your profit-maximizing price is:

$3.00

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 - Q. The monopoly price is:

$30

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 an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy?

$9

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. What is the annual profit that the video store expects to make on an average customer if it engages in optimal two-part pricing?

$9

Consider the following entry game: Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard," firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft,", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies?

(Not enter, Hard) and (Enter, Soft).

If a monopolist claims his profit maximizing markup factor is 3, what is the corresponding price elasticity of demand?

-1.5.

A monopoly produces X at a marginal cost of $10 per unit and charges a price of $20 per unit. Determine the elasticity of demand at the profit-maximizing price of $20.

-2

If the profit-maximizing markup factor in a three-firm Cournot oligopoly is 2, what is the corresponding market elasticity of demand?

-2/3

A monopoly produces X at a marginal cost of $80 per unit and charges a price of $100 per unit. Determine the elasticity of demand at the profit-maximizing price of $100.

-5

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?

0

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 revenue while 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 A innovate?

10>C>0

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q. What is the optimal amount of this product to package in a single block?

4

Consider a monopoly facing a demand structure where the price elasticity of demand is -1.25. The optimal markup factor is:

5 times marginal cost.

Which of the following is true?

A perfect equilibrium is always Nash.

Which of the following is a valid critique of the use of game theory in economics? A. Payoffs to players may be difficult to measure. B. Players may not have complete information about each other's payoffs. C. Game theory assumes rational players. D. All of the statements associated with this question are correct.

All of the statements are correct.

Economists use game theory to predict the behavior of oligopolists. Which of the following is crucial for the success of the analysis? A. Make sure the payoffs reflect the true payoffs of the oligopolists. B. Determine whether the oligopolists move simultaneously or sequentially. C. Determine whether the problem considered is of a one-shot or a repeated nature. D. All of the statements associated with this question are correct.

All statements are correct.

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. Which of the following is true? A. A dominant strategy for firm A is to advertise. B. A dominant strategy for firm B is to advertise. C. A Nash equilibrium is for both firms to advertise. D. All of the statements associated with this question are correct.

All statements are correct.

Firms will often implement randomized pricing in an attempt to reduce:

Both customer and competitor information about price.

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 can identify each consumer type and can price discriminate, what is the optimal price for a pair of pants?

Charge type A consumers $50, and type B consumers $75.

Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using?

Cross-subsidization.

Which of the following strategies will most likely NOT enhance profits in a Bertrand oligopoly?

Two-part pricing.

Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The local monopoly tries to maximize its profits by equating MC = MR and charging a uniform price. What will be the equilibrium price and output?

$13.33, 3.33 units.

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs. It faces an inverse demand function given by P = 38 - Q. The monopoly price is:

$23

A Nash equilibrium is a condition that:

Describes a set of circumstances in which no player can improve her payoff by unilaterally changing her own strategy, given the other players strategies.

Which of the following is a correct statement about a Nash equilibrium in a two-player game?

Given another player's strategy, no player can improve her welfare by unilaterally changing her strategy.

When a worker announces that he plans to quit, say next month, the "threat" of being fired has no bite. The worker may find it in his interest to shirk. What can the manager do to overcome this problem?

Provide the worker some rewards for good work that extend beyond the termination of employment with your firm.

Which group of policies aims at discouraging rivals from starting a price way?

Price matching and randomized pricing.

Firms will try to signal superior quality of their goods by:

Issuing warranties or guarantees.

Firms that use a price-matching strategy attempt to keep price at:

The monopoly price.

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q. What is optimal price to charge for a block of 20 units?

$90

Consider the following entry game: Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard," firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft," the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are perfect equilibrium strategies?

(Enter, Soft).

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 - Q. The demand elasticity of a widget at the monopoly price and quantity is:

-1.5

Which of the following is a correct statement?

A perfect equilibrium is always Nash.

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

All statements are correct.

Brand loyalty can be enhanced through:

An advertising campaign.

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. The optimal commodity bundling strategy is:

Charge $150 for a suit.

In a Cournot oligopoly with N firms and identical marginal costs, the relationship between the price elasticity of demand for the firm and that of the market is:

Ef+NEm

In a Cournot oligopoly with N firms and identical marginal costs, the relationship between the price elasticity of market demand and that of the firm is:

Em=Ef/N.

Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The firm currently uses a standard pricing strategy. Which of the following will allow the firm to enhance the profits?

Engage in two-part pricing.

Price-matching strategies may fail to enhance profits when:

Firms cannot prevent customers from making deceptive claims or firms haves different marginal costs.

Suppose a manager is interested in implementing third-degree price discrimination. The manager knows that the price elasticity of demand for Group 1 is -2 and the price elasticity of demand for Group 2 is -1.2. Based on this information alone we can conclude that the price charged to Group 2 will be:

Higher than the price charged to Group 1.

Which of the following is true?

In a finitely repeated game with a certain end period, collusion is unlikely because effective punishments cannot be used during any time period.

The special demand structure that induces a firm to use a cross-subsidization strategy is:

Interdependent demand for products.

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 - Q. Which of the following is the marginal revenue function for the firm?

MR=50-2Q

First-degree price discrimination:

Occurs when a firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased and results in the firm extracting all surplus from consumers

A coordination problem usually occurs in situations where there is:

More than one Nash equilibrium.

A monopolist claims his profit-maximizing markup factor is 10. What is the price elasticity of demand for the firm's product? A. -1.5 B. -2.0 C. -2.5 D. None of the answers are correct.

None of the answers are correct.

Which of the following statements is true regarding a simple pricing rule for monopoly and monopolistic competition?

P[(+Ef)/Ef]=MC

Which of the following pricing policies does NOT extract the entire consumer surplus from the market?

Peak load pricing.

A Broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of:

Price discrimination or peak-load pricing.

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

Price discrimination.

A mixed strategy is a strategy that:

Randomizes over two or more available actions in order to keep rivals from being able to predict a players action.

A dominant strategy is a strategy that:

Results in the highest payoff to a player regardless of the opponent's action.

Which of the following conditions correctly describes a Nash equilibrium when two firms are in the market?

TT1(S1*,S2*)>TT1(S1,S2*) for all S1 and TT2(S1*,S2)>TT2(S1*,S2) for all S2.

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 charges $75 for pants and $75 for a coat, the firm will sell a coat to:

Type A consumers and type B consumers

Which of the following is the major means to signal good quality of goods by firms?

Warranties/guarantees.

Game theory is best applied to the analysis of:

Oligopoly.

Which of the following pricing policies enhances profits by creating brand-loyal consumers?

Frequent flyer programs.

What price should a firm charge for a package of two shirts given a marginal cost of $4 and an inverse demand function P = 8 - 2Q by the representative consumer?

$12.

You are the manager of a Mom and Pop store that can buy milk from a supplier at $3.00 per gallon. If you believe the elasticity of demand for milk by customers at your store is -4, then your profit-maximizing price is:

$4.00

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 revenue while 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?

C<30

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/3. If A innovates and B does not, A earns $30 in revenue while B earns $10. If A innovates and B does likewise, both firms earn $20 in revenue. If neither firm innovates, both earn $10. Under what condition will firm B have an incentive to adopt if firm A adopts the innovation?

C<30

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. Suppose this game is repeated for a finite number of times, but the players do not know the exact date at which the game will end. The players can earn collusive profits as a Nash equilibrium to the repeated play of the game if the probability the game terminates in any period is:

Close to zero.

Which of the following enhances the ability of waste companies to collude?

Decals on waste receptacles.

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?

Definitely no.

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 10 years, then the Nash equilibrium is:

For each firm to advertise every year.

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:

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 10 years, then the Nash equilibrium is:

For each firm to not advertise in any year.

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 hand your business down to your children (and this "bequest" goes on forever), then a Nash equilibrium when the interest rate is zero is:

For each firm to not advertise until the rival does, and then to advertise forever.

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:

For neither to advertise.

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 a Nash equilibrium?

Management requests $50 and the labor union accepts $0.

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 revenue while B earns $0. If A innovates and B does likewise, both firms earn $15 in revenue. If neither firm innovates, both earn $5. If C = 15, which is the perfect equilibrium of the game?

Neither firm innovates.

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 hand your business down to your children (and this "bequest" goes on forever), then a Nash equilibrium is for each firm to:

Never 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. Which of the following is true? A. A dominant strategy for firm A is to advertise. B. A dominant strategy for firm B is to advertise. C. A Nash equilibrium is for both firms to advertise. D. None of the answers is correct.

None of the answers are correct.

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. Which of the following is true? A. A secure strategy for firm A is to not advertise. B. A secure strategy for firm B is to not advertise. C. Firm A does not have a secure strategy. D. None of the answers is correct.

None of the answers are correct.

The idea of charging two different groups of consumers two different prices is practiced in: A. two-part pricing. B. price matching. C. commodity bundling. D. None of the answers are correct.

None of the answers are correct.

Which of the following is NOT an important determinant of collusion in pricing games? A. The number of firms in industry. B.the punishment mechanisms that are in place. C.the history of the particular market. D. None of the answers are correct.

None of the answers are correct.

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. 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. C. A secure strategy is the optimal strategy for a player no matter what the opponent does. D. None of the answers is correct.

None of the answers are correct.

A firm has capacity limitations and charges $30 for its service during daily peak times. If the market demand elasticity drops from -3 during peak times to -5 at off-peak times, how much should the firm charge to earn the maximum profit during off-peak times? A. $20 B. $21 C. $24 D. Not enough information to determine

Not enough information to determine.

Game theory is especially useful for analysis in the following markets:

Oligopoly.

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

Price discrimination or peak-load pricing.