ECON207 Practice Final
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) A dominant strategy can best be described as
A) a strategy taken by a dominant firm.
B) the strategy taken by a firm in order to dominate its rivals.
C) a strategy that is optimal for a player no matter what an opponent does.
D) a strategy that leaves every player in a game better off.
E) all of the above
Scenario 1
Consider the following game:
2) Which of the following is TRUE for the game in Scenario 1?
A) NRG's dominant strategy is to sponsor the marathon.
B) NRG's dominant strategy is to sponsor the TV show.
C) Vita's dominant strategy is to sponsor the marathon.
D) Vita's dominant strategy is to sponsor the TV show.
E) Neither company has a dominant strategy.
3) In the game in Scenario 1, the equilibrium outcome:
A) is for both NRG and Vita to sponsor the marathon.
B) is for both NRG and Vita to sponsor the TV show.
C) is for NRG to sponsor the marathon and Vita to sponsor the TV show.
D) is for NRG to sponsor the TV show and Vita to sponsor the marathon.
E) does not exist in pure strategies.
4) Nash equilibria are stable because
A) they involve dominant strategies.
B) they involve constant-sum games.
C) they occur in noncooperative games.
D) once the strategies are chosen, no players have an incentive to negotiate jointly to change them.
E) once the strategies are chosen, no player has an incentive to deviate unilaterally from them.
5) Why does cooperative behavior break down in games with finite endpoints?
A) Each player has an incentive to deviate from a cooperative strategy during the last period.
B) A Nash equilibrium in pure strategies is not possible in finite repeated games.
C) Finite games have the same outcomes as one-period games, and cooperation is not possible in oneperiod games.
D) A Nash equilibrium is only possible in mixed strategies in finite repeated games, but all of the
probabilities assigned to particular strategies approach zero as the number of finite game periods
becomes large. Thus, we cannot evaluate the expected payoffs in these games.
6) Which would you expect to make the highest profits, other things equal?
A. Bertrand oligopolist.
B. Cournot oligopolist.
C. Stackelberg leader.
D. Stackelberg follower.
7) Firms that exhibit price-taking behavior
A) wait for other firms to set price, take it as given, and charge a higher price.
B) have outputs that are too small to influence market price and thus take it as given.
C) take pricing behavior in their own hands.
D) are independently capable of setting price.
8) Which of the following is true at the output level where P=MC?
A) The monopolist is maximizing profit.
B) The monopolist is not maximizing profit and should increase output.
C) The monopolist is not maximizing profit and should decrease output.
D) The monopolist is earning a positive profit.
9) An industry is comprised of 20 firms, each with an equal market share. What is the four-firm
concentration ratio of this industry?
A.
0.2
B.
0.4
C.
0.6
D.
0.8
10)Which of the following kinds of market structure are NOT associated with market power?
A.
Oligopoly
B.
Perfect competition
C.
Monopolistic competition
D.
Perfect competition and monopolistic competition
11) Which of the following is true under monopoly?
A.
Profits are always positive.
B.
P > MC.
C.
P = MR.
D.
All of the choices are true for monopoly.
12) You are the manager of a firm that sells its product in a competitive market at a price of $60. Your
firm's cost function is C = 50 + 3Q2. Your firm's maximum profits are:
A.
250.
B.
400.
C.
450.
D.
500.
13) Which of the following is true concerning the income effect of a decrease in price?
A) It will lead to an increase in consumption only for a normal good.
B) It always will lead to an increase in consumption.
C) It will lead to an increase in consumption only for an inferior good.
D) It will lead to an increase in consumption only for a Giffen good.
14) Based on the above Figure, food is:
A) a normal good.
B) an inferior good
C) a substitute for clothing.
D) none of the above
15) If we plot the quantity of aluminum ore mined per year on the horizontal axis and the real annual
price of aluminum ore on the vertical axis, we find that the path of price-quantity combinations
generally indicates lower real prices and higher quantities over time. Which of the following statements
is a plausible explanation for this observed outcome?
A) Aluminum supply shifted leftward.
B) Aluminum supply shifted rightward.
C) Aluminum demand shifted rightward.
D) none of the above
16) Suppose the market price for wheat changes, and we move from point A to point B on the wheat
demand curve. If the price elasticity of wheat demand was -0.3 at point A and -0.4 at point B, what is a
plausible value for the arc elasticity of demand for wheat between points A and B?
A) -0.25
B) -0.35
C) -0.45
D) -0.70
Numerical Question:
1. Compare and contrast the output levels and profits for the Cournot, Stackelberg, and Bertrand
models. Use the following cost and demand conditions for your comparison, and suppose there
are two firms:
zero.
. Each firm has a marginal cost of $20 and fixed costs of
2. The widget market is controlled by two firms: Acme Widget Company and Widgetway
Manufacturing. The structure of the market makes secret price cutting impossible. Each firm
announces a price at the beginning of the time period and sells widgets at the price for the
duration of the period. There is very little brand loyalty among widget buyers so that each
firm's demand is highly elastic. Each firm's prices are thus very sensitive to inter-firm price
differentials. The two firms must choose between a high and low price strategy for the coming
period. Profits (measured in thousands of dollars) for the two firms under each price strategy
are given in the payoff matrix below. Widgetway's profit is before the comma, Acme's is after
the comma.
a.
Does either firm have a dominant strategy? What strategy should each firm follow?
b.
Assume that the game is to be played an infinite number of times. (Or, equivalently, imagine
that neither firm knows for certain when rounds of the game will end, so there is always a positive
chance that another round is to be played after the present one.) Would the trigger strategy be a
reasonable choice? Explain this strategy.
c.
Assume that the game is to be played a very large (but finite) number of times. What is the
appropriate strategy if both firms are always rational?
a.
Each firm's dominant strategy is the low price. This follows from the realization that each player is
better off with the low price strategy regardless of the opponent's strategy.
b.
With an infinite number of trials, a trigger strategy is appropriate. Under trigger strategy, each player
chooses the high price so long as his rival cooperates by also choosing the high price. Once the rival
cuts prices, the other player retaliates.
c.
A finite number of periods implies a low price for every period. The process begins when each player
realizes its opponent cannot retaliate after the last period so that the low price is rational for the last
period. This in turn makes the low price rational for the next to last period and so on.
3. Suppose you are the manager of Alpha Enterprises, a firm that holds a patent that makes it the
exclusive manufacturer of bubble memory chips. Based on the estimates provided by a consultant, you
know that the relevant demand and cost functions for bubble memory chips are Q = 25 - 0.5P; C = 50 +
2Q.
a. What is the firm's inverse demand function?
P=50-2Q
b. What is the firm's marginal revenue when producing four units of output?
MR=50-4Q=34
c. What are the levels of output and price when you are maximizing profits?
Set MR=MC, Q=12
d. What will be the level of your profits?
P=50-2*12=26
TR-TC=26*12-50-2*12=238
Short Answer:
1. Why is collusion more likely in a repeated game?
Answer: First, a firm can signal other firms that it wishes to cooperate in one period, which could lead
to collusion in subsequent periods. Second, a firm can punish a firm for not restricting output. The threat
of punishment makes collusion more likely.
2. Would you expect the demand for a monopolistically competitive firm's product to be more or less
elastic than that for a monopolist's product? Explain.
Answer: More elastic. The products produced by monopolistically competitive firms are close
substitutes of each other which makes their demand curve more elastic relative to the monopolist’s.
True/False:
1. All normal-form games have at least one dominant strategy.
Answer: False, dominant strategies only arise if a player has a single strategy that provides higher
payoffs than any other strategy regardless of the other player's move.
2. Use the following two statements about monopolistic competition to answer this question.
I. In the long run, the price of the good will equal the minimum of the average cost.
II. In the short run, firms may earn a profit.
Answer:
I. True, In the long run, free entry/exit lead to zero economic profit, which means price equal the
minimum of the average cost.
II. True, in the short run, as long as price is above the average cost firms are earning a positive
profit.