Department of Economics
The Ohio State University
Final Exam–Econ 805
Profs. Levin, Morelli, and Peck
March 13, 2001
Directions:
Answer all questions, and show all work. Answer parts I and
II in separate booklets.
Part I:
(33 points, questions 1 and 2)
1. (18 points)
Consider a duopoly industry. The market inverse demand is given by
P
(
q
)=
1
¡
q
,where
q
=
q
1
+
q
2
is total industry output and where
q
1
and
q
2
are the
outputs of …rm 1 and …rm 2, respectively. Both …rms have constant marginal
cost functions denoted by
c
1
and
c
2
. It is common knowledge that
c
1
=: 0
.E
x
ante, …rm 2’s costs are random, where
c
2
=0
with probability
1
2
,and
c
2
=1
with probability
1
2
. (Firm 2 observes its own costs, while …rm 1 only knows the
ex ante distribution.)
(a) Solve for te CournotNash equilibrium of the simultaneous move game.
Namely, what are
q
1
;q
2
(0)
;
and
q
2
(1)
? What is the expected price? What are
the expected pro…ts of the two …rms?
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 Spring '08
 PECK
 Economics, competitive equilibrium, constant marginal cost

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