Economic Eqilibriums
1.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?
a) (enter, hard) and (not enter, hard)
b) (enter, soft) and (not enter, soft)
c) (not enter, hard) and (enter, soft)
d) (enter, hard) and (not enter, soft)
2.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:
a) $5.
b) $10.
c) $25.
d) $50.
P=MC=2Q=20-2Q
Q=5
P=MC=2*5=10
Fixed Tariff = (20-10)*5/2=25
3. play 2 t1 t2 t3 play 1 S1 10,0 5,1 4,-200 S2 10,100 5,0 0,-100
Which of the following pair of strategies constitute a Nash equilibrium of the game?
a) S1, t1
b) S1, t2
c) S2, t1
d) both b and c
4.Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm one commits to this collusive output, it pays firm two to
a) cheat by producing more output.
b) cheat by producing less output.
c) cheat by raising prices.
d) none of the above
5.The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a price of $10, and can hire labor at a
a) (enter, hard) and (not enter, hard)
b) (enter, soft) and (not enter, soft)
c) (not enter, hard) and (enter, soft)
d) (enter, hard) and (not enter, soft)
2.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:
a) $5.
b) $10.
c) $25.
d) $50.
P=MC=2Q=20-2Q
Q=5
P=MC=2*5=10
Fixed Tariff = (20-10)*5/2=25
3. play 2 t1 t2 t3 play 1 S1 10,0 5,1 4,-200 S2 10,100 5,0 0,-100
Which of the following pair of strategies constitute a Nash equilibrium of the game?
a) S1, t1
b) S1, t2
c) S2, t1
d) both b and c
4.Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm one commits to this collusive output, it pays firm two to
a) cheat by producing more output.
b) cheat by producing less output.
c) cheat by raising prices.
d) none of the above
5.The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a price of $10, and can hire labor at a