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midterm 1 practice3 - ECON 398 Fall 2006 Midterm 1 Practice...

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ECON 398 Fall 2006 Midterm 1 Practice Exam 3 Professor Ozdenoren INSTRUCTIONS You have 80 minutes to complete the exam. There are 16 questions.
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Wonder Cloak Inc. (C) and Scary Mask Inc. (M) are two shops situated on the opposite side of State Street. Since, Halloween is around the corner each owner is trying to set the prices to maximize their own profits. The demand for Wonder Cloak is given by Q C = 9-P C -2P M and demand for Scary Masks is given by Q M = 6 – P M – P C, where Q C is the amount of Cloaks sold per day and Q M the amount of Masks sold per day. Suppose that each cloak costs $1 to Wonder Cloak Inc. and each mask costs $2 to Scary Mask Inc. 1. If both shops set their prices simultaneously, what are the equilibrium prices for each shop? a. P C = 2, P M = 3 b. P C = 2, P M = 2 c. P C = 3, P M = 3 d. P C = 3, P M = 4 e. P C = 4, P M = 3 2. Now if the shops decide to collude, i.e. to set the prices together, what are the equilibrium prices? 3. Nikolay and Tanya are playing the following game: Left Right Up 1,3 x , 1 Down 2,2 3,4 Tanya is the row player and Nikolay is the column player. Tanya believes that Nikolay plays Left with probability ¾ and Right with probability ¼. Similarly, Nikolay believes that Tanya plays Up with probability ½ and Down with probability ½. For what value of x would these beliefs constitute a mixed strategy Nash equilibrium? a. 2 b. 3 c. 4 d. 6 e. 8
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Steve works for “Rockport” shoe manufacturing company and in a certain day he either puts high effort or low effort in his job. Giving high effort is strenuous for him and is worth -$25 per day.
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