Use the following to answer questions (1) – (7): Two firms (A and B) are attempting to set up a price fixing
scheme. Each firm must choose between maintaining the agreed upon price (i.e., Maintain P), or cutting
price (i.e., Cut P). The payoff matrix is indicated below:
B
Maintain P Cut P
Maintain P 15, 15 0, 20
A Cut P 20, 0 6, 6
Note: A’s payoffs (in millions of dollars) are listed 1
st
, while B’s payoffs (in
millions of dollars) are listed 2nd
.
[1] If this game is played once, then the Nash equilibrium is for A to ___ and B to ___.
A. Maintain P; Maintain P
B. Maintain P; Cut P
C. Cut P; Maintain P
D. Cut P; Cut P
[2] Suppose the game is played two times, with both A and B adopting a tit-for-tat strategy. Further,
suppose each player has a discount factor (ä) equal to 0.80. The corresponding interest rate (r) equals:
A. 0.80
B. 0.50
C. 0.25
D. None of the above
[3] Suppose the game is played two times, with both A and B adopting a tit-for-tat strategy. Further,
suppose each player has a discount factor (ä) equal to 0.80. Accordingly, we expect both players to select
___ in the first play of the game and both players to select ___ in the second play of the game.
A. Maintain P; Maintain P
B. Maintain P; Cut P
C. Cut P; Maintain P
D. Cut P; Cut P
[4] Continuing question (3), at the equilibrium each firm will have a present value of its profit stream
across the two plays of the game equal to:
A. 27
B. 19.8
C. 10.8
D. 9.33
[5] Suppose the game is repeatedly played an infinite number of times, with both A and B adopting a
triggerstrategy. If A’s discount factor (ä) = 0.80, coupled with it choosing to cheat in each play of the game,
then the present value of A’s profit stream across all plays of the game equals:
A. 75
B. 44
C. 30
D. 25
[6] Suppose the game is repeatedly played an infinite number of times, with both A and B adopting a
trigger strategy. If A’s discount factor (ä) = 0.50, then it is best for A to cooperate forever.
A. True
B. False
[7] Suppose this game is repeatedly played an infinite number of times, with both A and B adopting a
trigger strategy. Of the options below, what must A’s discount factor (ä) be closest to such that it is
indifferent between cooperating forever and cheating forever?
A. 0.80
B. 0.50
C. 0.35
D. 0.20
[8] Bertrand competitors, producing a homogeneous product, will price as perfectly competitive firms
at the Nash equilibrium.
A. True
B. False
[9] According to the kinked demand curve model, a firmexpects competing firms to increase their prices
if the firm chooses to increase its price.
A. True
B. False
[10] A firm will not want to move from being a Cournot producer to a Stackelberg follower because its
profit will likely decrease.
A. True
B. False
[11] Cartel behavior is an example of explicit cooperation.
A. True
B. False
[12] In the case of a quantity-setting cartel, cheating on the cartel agreement coincides with:
A. producing beyond the quota.
B. producing below the quota.
C. producing at the quota.
D. none of the above.
Use the following to answer questions (13) through (24): Suppose two firms, A and B, are the only firms in
a particular market and are initially competing according to the Cournot model of oligopoly. The market
demand is given by: Q = 25 – P, where Q is the market quantity and P is the market price. Further, suppose
A and B have short-run total costs given by:
A’s Total Cost (TCA): TCA = 10 + 7qA (where qA is A’s quantity produced)
B’s Total Cost (TCB): TCB = 10 + 7qB (where qB is B’s quantity produced)
[13] Suppose A believes, regardless of how much A produces, B will produce 4 units. Accordingly, the
equation of A’s marginal revenue is then:
A.
B.
C.
D. None of the above
[14] Suppose A believes, regardless of how much A produces, B will produce 4 units. Accordingly, the
profit-maximizing quantity for A is then:
A. 7
B. 9
C. 11
D. None of the above
[15] At the Cournot equilibrium, A will produce ___ units.
A. 9
B. 7
C. 6
D. None of the above
[16] At the Cournot equilibrium, the market price equals:
A. 11
B. 12
C. 13
D. None of the above
[17] Regarding the answer to question (16), the Cournot market price is higher than the monopoly price
but lower than the perfectly competitive price.
A. True
B. False
[18] At the Cournot equilibrium, A’s profit equals:
A. 32
B. 26
C. 25
D. None of the above
[19] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at the
Stackelberg equilibrium, A will wish to produce ___ units.
A. 7
B. 8
C. 9
D. 12
[20] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at the
Stackelberg equilibrium, the market price is higher than the answer from question (16).
A. True
B. False
[21] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at the
Stackelberg equilibrium, A will see its profit increase compared to the answer from question (18).
A. True
B. False
[22] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at the
Stackelberg equilibrium, B will wish to shutdown production.
A. True
B. False
[23] Suppose A and B decide to form a cartel. Interested in maximizing joint profit, the market quantity
should be set equal to:
A. 12
B. 9
C. 7.5
D. None of the above
[24] Suppose a third firm entered the market, having the same cost structure as firms A and B. If these
three firms behave according to the Cournot model, then the market price would be ____ as the answer in
question (16).
A. lower
B. higher
C. the same
D. All of the above are possible
[25] Cooperation can be sustained by playing the prisoners’ dilemma (cartel) game a finite number of
periods, coupled with a tit-for-tat strategy.
A. True
B. False
Use the following to answer questions (26) – (31): Consider a firm faces the following demand function:
q = 20 – 4p for 0 # q # 4,
q = 12 – 2p for 4 # q # 12,
where q is the quantity demanded of the firm’s product and p is the price charged by the firm.
[26] At p = 2, quantity demanded equals:
A. 12
B. 8
C. 6
D. 4
[27] Suppose the firm’s marginal cost and average total cost are both constant at 3.00. What price should
the firm set?
A. 4.50
B. 4.00
C. 3.50
D. 3.00
[28] Suppose the firm’s marginal cost and average total cost are both constant at 2.75. What price should
the firm set?
A. 2.75
B. 3.00
C. 4.00
D. 4.25
[29] Suppose the firm’s marginal cost and average total cost are both constant at 2.50. What price should
the firm set?
A. 4.00
B. 3.00
C. 2.50
D. 2.00
[30] Suppose the firm’s marginal cost and average total cost are both constant at 2.25. What price should
the firm set?
A. 2.25
B. 3.00
C. 4.00
D. 4.25
[31] The above demand adheres to which model of oligopoly behavior?
A. Bertrand
B. Infinitely repeated prisoners dilemma
C. Stackelberg
D. None of the above
Use the following to answer questions (32) and (33):
Imagine Frida receives the following payoffs over time: Payoff in period 1 (today) = $300, Payoff in period
2 = $200, and Payoff in period 3 = $400.
[32] Assuming Frida’s discount factor (ä) equals zero, then the accumulated present value of Frida’s
payoff stream over the 3 periods equals:

A. $900
B. $500
C. $300
D. None of the above
[33] Assuming Frida’s discount factor (ä) equals 0.50, then the accumulated present value of Frida’s
payoff stream over the 3 periods equals:
A. $900
B. $500
C. $300
D. None of the above
Use the following to answer questions (34) – (37):
[34] Imagine two firms, A and B, are Bertrand price competitors, with each facing the following price
reaction functions:
Firm A: Firm B:
Accordingly, at the Bertrand equilibrium, firm A sets its price at ___, while firm B sets its price at ___.
A. 200; 100
B. 400; 1000
C. 300; 300
D. None of the above
[35] The Bertrand equilibrium corresponds to a Nash equilibrium.
A. True
B. False
[36] It must be that the products produced by A and B are differentiated.
A. True
B. False
[37] If PB increases, it must be that the demand for A’s product will decrease.
A. True
B. False
[38] Suppose two firms, A and B, form a cartel, with each producing 50 units of output (corresponding
to the joint profit maximizing quota outputs). If B produces 50 units, then A’s _______ will be greater than
its _______ at its quota output level.
A. average total cost; price
B. marginal cost; marginal revenue
C. marginal revenue; marginal cost
D. marginal revenue; price
[39] Suppose firms 1 and 2 are engaging in a price fixing scheme, a signal to firm 1 that firm 2 has
cheated on the agreement is if:
A. the market price increases.
B. the market quantity decreases.
C. firm 1’s sales decrease.
D. both firms adopt a meet the competition clause.
[40] Imagine firms A and B compete according to the Cournot model. In the graph below, A’s reaction
curve is labeled RA, while B’s reaction curve is labeled RB.
Suppose B’s quantity equals 0, then A’s best response to that quantity is to set its quantity equal to:
A. 18
B. 25
C. 28
D. 50