Sample questions 2019.docx - Sample questions Please ensure...

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Sample questions Please ensure you go through. We are seven in the full time class and I have assigned each question to each student. Question one (Namukolo) Consider an industry with two firms that produce a homogeneous product and compete in quantities. Unit costs of the two firms are c 1 and c 2 and the industry inverse demand function is given by p = a – ( q 1 + q 2). a. Find the Nash equilibrium of the single-stage game in which firms simultaneously set quantities. Show how the equilibrium profit of firm 1 depends on c 1 and c 2 and provide an intuition for this result using reaction curves. b. Now consider a two-stage game as follows. The second stage is as described in part a above. In the first stage firm 1 can undertake R&D to lower its second stage unit cost. In particular, spending R yields c 1 = c R 1/2, where c is a constant. Discuss the incentives that firm 1 has to invest in R&D. What is the optimal choice of R for firm 1? Provide some intuition using reaction curves. Question two(yoka) Consider a market where there are two differentiated goods. The demand for good 1 is given by q 1 = a bp 1 + dp 2 and that for good 2 is given by q 2 = a bp 2 + dp 1, where a > 0 and 0 < d < b . The production cost of each good is zero. a. Suppose that both goods are produced by the same firm (a monopolist). Compute the prices set by the monopolist.
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Christopher Reinemann
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