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Microeconomics II
Homework#3
Spring 2009
Due day: 5/19
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I. Multiple choice questions
01) Perfect competition and monopolistic competition are similar in that both market structures
include
A) price-taking behavior by firms.
B) a homogeneous product.
C) no barriers to entry.
D) very few firms.
Answer: C
02) The Bertrand model is a more plausible model of firm behavior than the Cournot model
A) when firms set the quantity to be sold.
B) when firms sell a differentiated product.
C) because firms that sell a non-differentiated product typically act as price takers.
D) because the Bertrand model predicts that firms will price at marginal cost.
Answer: B
03) In the long run, a monopolistically competitive firm
A) earns zero economic profit.
B) produces at minimum average cost.
C) operates at full capacity.
D) All of the above.
Answer: A
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04) Which of the following models results in the highest level of output assuming a fixed number of
firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel
Answer: B
05) The outcome of the Stackelberg model is
A) a Nash equilibrium.
B) the same as the Cournot outcome.
C) that the follower earns zero profit.
D) that the follower cannot be on its best-response curve.
Answer: A
06) The Cournot Model of Oligopoly assumes that
A) firms decide what quantity to produce.
B) firms make their decisions simultaneously.
C) firms do not cooperate.
D) All of the above.
Answer: D
07) In the short run a monopolistic competitor
A) produces at minimum efficient scale.
B) produces where P = AC.
C) sets P = MC.
D) sets MR = MC.
Answer: D
Topic: Monopolistic Competition
08) In a two-player simultaneous game, if player A has a dominant strategy and player B does not,
player B will
A) employ a mixed strategy.
B) choose his best strategy assuming that player A plays her dominant strategy.
C) not achieve a Nash equilibrium.
D) assume that player A does not choose her dominant strategy.
Answer: B
Topic: Preventing Entry: Simultaneous Decisions
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09) In a two-player simultaneous game where neither player has a dominant strategy,
A) there is never a Nash equilibrium.
B) there is only one Nash equilibrium.
C) the actual outcome can be unpredictable.
D) the actual outcome will not be a Nash equilibrium.
Answer: C
Topic: Preventing Entry: Simultaneous Decisions
10) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an
isolated town. If firm A chooses its strategy first, then
A) firm A will not enter.
B) firm B's entry is blockaded.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: C
Topic: Preventing Entry: Sequential Decisions
11) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an
isolated town. Suppose a $60 fee is required to enter the market. If firm A chooses its strategy
first, then
A) firm A will not enter.
B) neither firm will enter.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: D
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12) In the Stackelberg model, the leader has a first-mover advantage because it
A) has lower costs than the follower.
B) commits to producing a larger quantity.
C) reacts to the follower's decision.
D) differentiates its output.
Answer: B
Topic: Preventing Entry: Sequential Decisions
13) If a Cournot duopolist announced that it will double its output
A) it becomes the leader.
B) the other firm does not view the announcement as credible.
C) the other firm will shut down.
D) the other firm will double output also.
Answer: B
Topic: Preventing Entry: Sequential Decisions
14) In a duopoly, if advertising only takes customers from rivals rather than attracting new
customers, then
A) neither firm will advertise.
B) there is no dominant strategy.
C) the result is similar to the prisoners' dilemma.
D) only one firm will advertise.
Answer: C
Topic: Advertising
15) In a duopoly, if advertising only takes customers from rivals rather than attracting new
customers, the two firms would prefer
A) the Nash equilibrium level of advertising.
B) to advertise more than the current level.
C) to not change the level of advertising.
D) an advertising ban.
Answer: D
Topic: Advertising
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II. Problem
1.(ch13 AP9)
1. Assume that the payoffs in the matrix below are profits from various
output choices, based on a non-cooperative game, with A as the leader.
Because of product tie-ins, the firms must choose to produce either 60
units or 30. No other output levels are possible. Re-write the payoffs in
extended “tree” form similar to Figure 13.5 in the text. Payoffs shown are
A, B. What is the equilibrium? How would your answer change if B was
the leader?
Ans:
See Figure 13.1. Firm A as the leader will choose to produce 60, knowing that
B’s best response is to produce 30. Because the matrix is symmetric, the game
players would end up with the same total output, but would produce 60 and A
would produce 30.
Figure 13.1
2.(ch13 Q11)
2. Does an oligopoly or a monopolistically competitive firm have a supply
curve? Why or why not?
Ans:
No. As with the monopolist, there is no unique relationship between price and
output. A change in demand may produce a change in price but no change in
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output, a change in output but not price, or a change in both.
3.(ch14 Q4)
3. Two firms are planning to sell 10 or 20units of their goods and face the
following payoff matrix:
Firm2
10
20
10
Firm 1
20
30
30
35
50
60
40
20
20
a. What is the Nash equilibrium or equilibria if both firms make their
decisions simultaneously? (What strategy does each firm use?)
b. Suppose that Firm 1 can decide first. What is the outcome? Why?
c. Suppose that Firm 2 can decide first. What is the outcome? Why?
Ans:
a. There are two Nash equilibria (the off diagonals). If either firm produces 20
while the other produces 10, neither player has an incentive to change
strategies given the strategy of the other player.
b. If Firm 1 can choose first, it will commit to selling 10 units, and Firm 2 sells
20 units. If Firm 1 were to choose 20 units, Firm 2 would choose to produce
10 units, reducing Firm 1’s payoff by $10.
c. If Firm 2 can choose first, it will sell 10 units, and Firm 1 will sell 20. If
Firm 2 were to produce 20 units, Firm 1 would produce only 10, reducing
Firm 2’s payoff by $25.
4.(ch14 Q23)
4. Suppose that you and a friend play a “matching pennies” game in which
each of you uncovers a penny. If both pennies show heads or both show
tails, you keep both. If one shows heads and the other shows tails, your
friend keeps them. Show the payoff matrix. What, if any, is the pure
strategy Nash equilibrium to this game? Is there a mixed strategy Nash
equilibrium? If so, what is it?
Ans:
The payoff matrix is shown below. Given these payoffs, mixed strategies are
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required. There is no Nash equilibrium because in any given cell the
outcome (winner) changes if one player changes strategies. Thus in any
given cell the loser would always prefer to switch given the opponent’s
strategy.
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