Midterm_2_Practice_Questions

# Midterm_2_Practice_Questions - Practice Midterm Exam 2 1...

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Practice Midterm Exam 2 1. Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) or the low end (low quality). Resulting profits are given by the following payoff matrix: Firm 2 Low High Firm 1 Low -20, -30 900, 600 High 100, 800 50, 50 What outcomes, if any, are Nash equilibria? 2. Firm A has developed a new product and must now decide whether to install enough capacity to produce either one or two units of the product. It expects production costs to be CA ( q ) = 8 q + q 2 (there are no costs of installing capacity) and it estimates demand for the product at Q = 10 0.5 p . It also expects a rival firm, B , to shortly develop a clone of the product and then to install enough capacity to produce one or two units as well. It expects Firm B to have identical costs and to play Cournot. a) Represent this situation as an extensive-form game and deduce what capacity Firms A and B will install. b) Explain why it is always the case that a single-period, Cournot equilibrium is a Nash equilibrium? 3. A monopoly with constant marginal costs of \$50 can sell to three groups of potential consumers, with demands Q 1 =800 -0. 2 p, Q 2 =400 -p, and Q 3 =700 -0. 4p respectively. Find the optimal price-quantity combination in each market a) if the firm is able to price-discriminate;

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Midterm_2_Practice_Questions - Practice Midterm Exam 2 1...

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