Consider the following entry game: Here, fi

05 Jun Consider the following entry game: Here, fi

Question
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)

(not enter, soft)

(not enter, hard)

(enter, hard)

Top of Form

A firm has a total cost function of C(Q) = 50 + 10Q1/2. The firm experiences:

diseconomies of scale.

constant returns to scale.

All of the statements associated with this question are correct, depending on the quantity.

economies of scale.

Bottom of Form

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

$10

$11

$12

Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 ? 2Q. The cost function for each firm is C(Q) = 4Q. In equilibrium, the deadweight loss is:

$128.

$512.

$384.

$256.

Both firms in a Cournot duopoly would enjoy higher profits if:

the firms simultaneously reduced output below the Nash equilibrium level and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.

each firm simultaneously increased output above the Nash equilibrium level.

the firms simultaneously reduced output below the Nash equilibrium level.

one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.

Top of Form

A manager is attempting to assess the probability of a recession ending in the next six months, and its impact on expected profitability. The manager believes there is a 75 percent chance the recession will end in six months and profits will return to $400 million. However, there is a 25 percent chance the recession will not end in six months, resulting in a $5 million loss. The standard deviation of profits over the next six months is:

$0 million.

$286.39 million.

$320.18 million.

$175.37million.

Bottom of Form

Eric provides cheese (H) and milk (M) to the market with the following total cost function: C(H, M) = 10 + 0.4H2 + 0.2M2. The prices of cheese and milk in the market are $2 and $5 respectively. Assume that the cheese and milk markets are perfectly competitive. What output of milk maximizes profits?

1.25

12.5

15

20

Top of Form

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 NOT a Nash equilibrium?

Rev: 05_10_2014_QC_49353

Management requests $25 and the labor union accepts $25.

Management requests $30 and the labor union accepts $10.

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

Neither management requesting $50 and the labor union accepting $0 nor management requesting $30 and the labor union accepting $10 are Nash equilibria.

Bottom of Form

Suppose that there are two types of cars, good and bad. The qualities of cars are not observable but are known to the sellers. Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:

icture

When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?

$2,500

$4,500

$4,000

$3,000

Top of Form

Suppose you are an analyst for the Coca-Cola Company. An individual’s inverse demand for Coca-Cola is estimated to be P = 98 ? 4Q (in cents). If Coca-Cola is produced according to the cost function C(Q) = 1,000 + 2Q (in cents), compute the optimal price and the number of cans to sell as a single package.

$12 per package and 24 cans

$15 per package and 16.67 cans

$120 per package and 12 cans

$11.52 per package and 12 cans

Bottom of Form