Exam 2 review
 study homework and try problems at the end of each chapter and throughout the book
Chapter 8: Commodity Bundling and Tie-In Sales
1. Know the difference between bundling and tie-in sales.
2. Be able to provide/differentiate between these if given an example.
3. Be able to mathematically calculate the optimal no bundle price, pure bundle price, and
mixed bundle price. Be able to determine efficiency between these. You do not need to
know those ABCD graphs. Recall, most of this is “trial and error” for optimal prices. Be
sure you really understand when/why a mixed bundle is more efficient (who are you
keeping from the bundle and why).
4. Understand the basic relationship to tie in sales and our old friend the two part
tariff/menu prices.
Chapter 9: Static Games and Cournot Competition
1. Be able to interpret payoffs, strategies, best responses in static games.
2. Be able to find/define dominant strategies.
3. Be able to define/identify a prisoner dilemma game.
4. Be able to solve for Nash Equilibria using best responses (with and without dominant
strategies).
5. Understand Cournot competition. Be able to mathematically solve for the Nash Equilbria
(quantities and price) for a given demand curve and given marginal cost. Be able to show
graphically best response functions (labeling each correctly).
6. Be able to generalize to N firms. And think about what happens if costs change/aren’t the
same and/or when symmetry cannot be exploited.
Chapter 10: Price Competition
1. Understand the Nash Equilibrium for the Bertrand game. Be able to solve for it
mathematically (you will NOT have to graph here).
2. Understand, conceptually, what capacity constraints are and how they impact the NE in
the Bertrand game.
3. Understand conceptually, what differentiation does to the Bertrand game.
Chapter 11: Dynamic Games and First and Second Movers
1. Be able to solve for Stackelberg quantities and price when quantity is the choice variable.
2. Be able to solve for Stackelberg quantities and price when price is the choice variable.
3. Be able to relate Stackelberg quantities, prices to Cournot, Bertrand, and Monopoly.
4. Be able to draw an extensive form game and solve for the SPE (subgame perfect
equilibria).
5. Understand what threats are credible and which are not.
Chapter 12 and 13: Limit Pricing and Entry Deterrence
1. Define predatory conduct (difference between predatory pricing and limit pricing).
2. Be able to find the residual demand for an entrant
3. Be able to model entry deterrence as an extensive form game
4. Discuss and interpret other ways to deter entry
Past exam questions:
1. Assume that two firms face the following inverse market demand: P (Q )  50 
1
Q.
2
Assume the marginal cost for both firm 1 and firm 2 is constant and equal to 5 and that
neither firm faces a fixed cost. Feel free to leave anything as a fraction.
a) If the firms simultaneously choose price, what is the equilibrium price and quantity for
each firm?
b) If the firms simultaneously choose quantity, what is the equilibrium price and quantity
for each firm?
c) If the firms sequentially choose price, what is the equilibrium price and quantity for
each firm?
d) If the firms sequentially choose quantity, what is the equilibrium price and quantity for
each firm?
e) If the firms are Bertrand competitors, what happens to the price and quantity for each
firm if they face different marginal costs? That is, c1  c2 . Explain. You DO NOT need
to solve, you can just discuss direction.
2. A recent trend in major cities has been to make it illegal for restaurants to cook with
transfats (transfats have been linked to the increase in obesity and heart related problems
in our country). Even in cities in which it is not yet illegal to use transfats in restaurants,
many restaurants have voluntarily opted to change from oils with transfats to using oils
without transfats.
Suppose two firms exist: Royal Farms (player 1) and KFC (player 2). The strategies for each
firm are to use transfats or to not use transfats. If both firms use transfats, both earn profits of
$100 million. If only one firm chooses not to use transfats, it will earn a profit of $180
million, while the firm that uses transfats will earn a profit of $75 million. If both firms do
not use transfats they will both earn profits of $140 million.
a)
b)
c)
d)
Illustrate this with a static form game matrix.
Find the Nash Equilibrium for both players.
Is this a prisoner dilemma game? If so, why? If not, why not?
In your own words, define a Nash Equilibrium.
3. Consider a local fast-food restaurant. The following table shows the maximum price that
Alex, Barbara, Colin, Derek, and Erik will pay for chicken nuggets and fries. Assume the
fixed cost is $0.00, the marginal cost of chicken nuggets is $1.00 and the marginal cost of
fries is $0.50.
Willingness to pay for Chicken
Willingness to pay for Fries
Nuggets
Alex
$1.50
$1.50
Barbara
$2.00
$1.00
Colin
$2.55
$0.45
Derek
$0.75
$2.25
Erik
$3.00
$0.75
a) Find the profit at the profit maximizing price for chicken nuggets and fries if the local
fast-food restaurant does not bundle.
b) Find the profit if the restaurant engages in pure bundling.
c) Find the profit if the restaurant engages in mixed bundling. Will the firm choose to
engage in mixed bundling? Explain.
4. Find the SPE, and also identify the subgames.
Software Game
Macrosoft
simple
Microcorp
enter
stay out
$400, $100
$800, $0
slick
Microcorp
enter stay out
$380, -$250
$430, $0
5. Let the domestic market for small, specialized calculators and similar office equipment
be currently served by one firm, called firm I. The firm has the following cost TC(QI) =
0.025QI2. Market demand is given by P = 50 – 0.1Q.
a) If the incumbent is the only firm in the market, what price will it charge and what is the
profit maximizing quantity?
b) Suppose that a foreign producer of calculators is considering exporting to the U.S.
market. The entrant faces the following costs TC(QE) = 10QE + 0.025QE2. Suppose that
the incumbent is committed to producing the monopoly level (you found in a). What is
the residual demand curve faced by the potential entrant? What will be the entrant’s
quantity? What is the new price in the market?
c) What level would the incumbent firm have to commit to in order to deter the foreign firm
from entering the market? (That is, find the QILimit.) Would the incumbent chose to do this
or would they prefer to accommodate entry? Explain.