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Multiple Choice Questions: Questions on Game Theory and Oligopoly: 1. A ________ shows how much a firm will produce as a function of how much it thinks its competitors will produce. A) contract curve B) demand curve C) reaction curve D) Nash equilibrium curve E) none of the above 2. In the ________, two duopolists compete by simultaneously selecting price. A) Cournot model B) Nash model C) Bertrand model D) kinked-demand model E) none of the above 3. In comparing the Cournot equilibrium with the competitive equilibrium, A) both profit and output level are higher in Cournot. B) both profit and output level are higher in the competitive equilibrium. C) profit is higher, and output level is lower in the competitive equilibrium. D) profit is higher, and output level is lower in Cournot. For questions 4-10, please refer to the information given below. Suppose a market is served by two firms (a duopoly). The market demand function given by P = 1200 – Q1 – Q2 where Q1 is the output produced by firm 1 and Q2 is the output produced by firm 2. Firm 1’s cost of production is given by the function C(Q1) = 120Q1 and firm 2’s cost of production is given by the function C(Q2) = 120Q2. The average cost of firm 1 is given by AC1 = 120 and the average cost of firm 2 is given by AC2 = 120. Marginal profit function for firm 1: Δ?1Δ?1=1080−2?1−?2 Marginal profit function for firm 2: Δ?2Δ?2=1080− ?1− 2?2 4. What are the equilibrium output levels of firm 1 and firm 2 in the Cournot model equilibrium? (A) Firm 1 = 320 units, firm 2 = 320 units (B) Firm 1 = 340 units, firm 2 = 340 units (C) Firm 1 = 360 units, firm 2 = 360 units (D) Firm 1 = 380 units, firm 2 = 380 units 3 5. What will be the equilibrium market price in the Cournot model? (A) 420 (B) 480 (C) 460 (D) 500 6. What will be the profit earned by each of the symmetric firms in the Cournot market equilibrium? (A) $129,600, $129,600 [First number belongs to firm 1 and second number belongs to firm 2.] (B) $126,900, $126,900 (C) $128,600, $126,800 (D) $129,900, $129,900 7. What will be the equilibrium output level produced by the Stackelberg leader (first-mover) firm? Note – Assume firm 1 is the Stackelberg leader and firm 2 is the Stackelberg follower. Stackelberg leader’s marginal profit function: Δ?1Δ?1=540−?1, (A) 450 (B) 540 (C) 504 (D) 405 8. What will be the equilibrium output level produced by the Stackelberg follower (second-mover) firm? (A) 270 (B) 360 (C) 420 (D) 450 9. What will be the equilibrium profit levels earned by the Stackelberg leader firm and the Stackelberg follower firm? (A) $145,400, $72,900 (B) $145,800, $72,900 (C) $142,400, $80,500 (D) $72,900, $72,900 10. For two symmetric firms, when we compare the equilibrium outcomes (output, price and profit levels) of the Cournot model with the Stackelberg model, we learn (A) Stackelberg leader produces more and earns less than the Cournot firm while the Stackelberg follower produces less and earns more than the Cournot firm. (B) Stackelberg leader produces more and earns more than the Cournot firm while the Stackelberg follower produces and earns the same as the Cournot firm. 4 (C) Stackelberg leader produces more and earns more than the Cournot firm while the Stackelberg follower produces less and earns less than the Cournot firm. (D) The two economic models are not comparable. Consider the following game for questions 11 and 12: 11. Which of the following is true about the game in the game above? (A) ABC's dominant strategy is to offer a rebate. (B) ABC's dominant strategy is not offering a rebate. (C) XYZ's dominant strategy is to offer a rebate. (D) XYZ's dominant strategy is not offer a rebate. (E) Both ABC and XYZ offer a rebate as a dominant strategy. 12. In the game above, the equilibrium strategies (A) are for both firms to offer rebates. (B) is for ABC to offer a rebate, and XYZ not to offer a rebate. (C) is for XYZ to offer a rebate, and ABC not to offer a rebate. (D) are for both firms to offer no rebate. (E) does not exist in pure strategies. Consider the following game for questions 13 and 14: 13. Which of the following is TRUE for the game in the game above? (A) NRG's dominant strategy is to sponsor the marathon. (B) NRG's dominant strategy is to sponsor the TV show. 5 (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. 14. In the game above, 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. Questions on Market with Asymmetric Information: 15. Julia is a 28-year-old nonsmoking, non-drinking female of normal weight. Because of adverse selection in health insurance, (A) She will be charged less for her premiums than people who are higher risks. (B) She is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is. (C) When she gets health insurance, she will be less likely to take care of herself. (D) She must get health insurance early in life, and is likely to lose health insurance if she smokes, drinks to excess, or gains weight. (E) She is more likely than the average person to buy health insurance, because she is more likely to be offered it. 16. Consider a market in which high-quality and low-quality television sets are sold. Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know. As compared to a situation where both consumers and sellers know the quality of the sets, this situation would (A) cause no change in the ratio of low to high-quality sets sold. (B) increase the fraction of high-quality sets sold. (C) increase the fraction of low-quality sets sold. (D) cause the average price of goods sold to rise. 17. Augustus bought his BMW convertible as a new car in 1998 and knows that it is in excellent condition. He now wants to sell it and knows that there are many other similar cars on the used car market that are lemons. As a result: (A) he should be able to sell my car at a premium price because of its excellent condition. (B) he will have to accept a lower price for his car because buyers might think that it is a lemon. (C) he will not be able to sell his car unless he offers some sort of guarantee. (D) he will get the best price for his car by selling it to a dealer. 6 18. Credit histories allow firms to (A) identify high-risk borrowers, so they can be eliminated and interest rates kept down for others. (B) increase the number of credit cards issued, and interest rates go up as a result. (C) increase the number of credit cards issued, and interest rates go down as a result. (D) lower the number of credit cards issued, and interest rates go up as a result. (E) increase market power in the credit card industry, raising interest rates. 19. The completion of a degree or course of study is a good labor market signal (A) only if what is learned in that educational process relates directly to the job the individual is being considered for. (B) only if there is a positive correlation between academic success and wage income. (C) primarily because individuals develop good habits in college that serve them well in other areas later on. (D) because all individuals have the opportunity (in the United States) to pursue higher education. (E) because people who possess the traits that make them more productive in the workplace have an easier time completing an education than those who don't. 20. When a moral hazard problem exists for automobile driving, the marginal cost of driving (A) is lowered, and the amount of driving done is raised above the efficient level. (B) is lowered, and the amount of driving done is lowered below the efficient level. (C) is raised, and the amount of driving done is raised above the efficient level. (D) is raised, and the amount of driving done is lowered below the efficient level. (E) is raised above the efficient level, but market forces keep the total amount of driving is kept at the efficient level.