Practice exam no.

1- for fun and learning - ECOS2201

The following set up applies for the next two questions.

1. There are two firms in market that simultaneously set their production quantities of a
homogenous good. Market demand is given by P = a bQ, where P is market price and Q is market
quantity. Let the output of firm 1 be denoted by q1 and the output of firm 2 be denoted by q2. Each
firm has constant marginal costs of c. In the Nash equilibrium of the game, what is the output level of firm
1?

ac

(a) q1 = 3.
*

(b) q1 =

ac
3b

(c) q1 =

3(a c )
2b

(d) q1 =

ca
2b

2. In the Nash equilibrium, what is firm 1s profit?

(a)

1 =

(a c) 2
9b

(c a ) 2
(b) 1 =
3b
(a c) 2
(c) 1 =
b
(d)

1 =

(3a 3c)
b

3. Both Carol and Jackie produce a homogenous product. They both have zero marginal costs and
simultaneously choose output. The market demand curve for the product is P = 1 - Q, where Q total
output. In equilibrium what is the output of Carol and Jackie?

a.qj = qc = 1/3
b. qj = qc = 1/2
c. qj = qc = 1/4
d. qj = , qc = 1/4
e. None of the above

12. Both Carol and Jackie produce a homogenous product. They both have zero marginal costs.
Jackie chooses her output first; having observed qj, Carol then chooses her output level. The market
demand curve for the product is P = 1 - Q, where Q total output. In equilibrium what is the output of
Carol and Jackie?

a.qj = qc = 1/3
b. qj = qc = 1/2
c. qj = qc = 1/4
d. qj = , qc = 1/4
e. None of the above

4. Both Carol and Jackie produce a homogenous product. They both have zero marginal costs. Jackie
chooses her output first; having observed qj, Carol then chooses her output level. The market
demand curve for the product is P = 1 - Q, where Q total output. Which statement is true?

a. The choices of each firm are strategic complements.

b. It is not possible to say whether the choices of the two are strategic complements or substitutes
given the above information
c. All of the above.
d. The choices of each firm are strategic substitutes
e. None of the above.

5. A way of softening price competition between rivals is to

a. lower marginal cost

b. increase product differentiation
c. lower the transport costs of consumers
d. increase a firms capacity
e. none of the above

6. Both Carol and Jackie produce a homogenous product. They both have zero marginal costs and
simultaneously choose price. Consumers buy from the cheapest seller; if both prices are the same
consumers evenly split between the vendors. In equilibrium what is the price of Carol and Jackie?

a. pc = pj = 0
b. pc > pj = 1
c. pc = pj >0
d. All of the above
e. None of the above.

Short answer

1. Use the Hotelling model to show how product differentiation can help firms increase the prices
they charge to consumers.

2. Review the model of deterrence and accommodation from lectures. If an investment makes an
incumbent tough, the two firms choices are strategic substitutes and the incumbent wants to
accommodate entry, what is the appropriate strategy?

3. What are the advantages of opening a network to rivals? What are the disadvantages?

4. Review the hold-up problem. How will this affect a firm