midterm_2_460_Fall_07_Boyer_answers - Your name: _ MICHIGAN...

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Your name: ____________________________________ MICHIGAN STATE UNIVERSITY Department of Economics Econ 460 Prof. Boyer Fall 2007 Second Midterm Exam Answer any eight of the following ten questions. All questions are 10 minutes and worth 8 points: 1) Consider the following matrix for two local grocery stores in a small town. They have each developed two different strategies. Figures in parentheses show (profits for Firm A, profits for firm B) for every combination of strategies. Does either firm have a dominant strategy? (2 points) Explain how you can tell (2 points.) Is there a Nash equilibrium? (2 points) Explain how you can tell (2 points.) Firm B advertises in the local newspaper Firm B lowers its price 10% Firm A uses double coupons (100,100) (555,470) Firm A stays open 24 hours (455,200) (120,150) Neither firm has a dominant strategy since there is no best choice regardless of what the competitor does. Yes there is a Nash equilibrium. (Actually there are two.) Staying open 24 hours is firm A’s best response to Firm B’s advertising in the local newspaper, and Advertising in the local newspaper is the best response to firm A’s staying open 24 hours. Or, alternatively, lowering price 10% is the best response to firm A’s using double coupons and Firm A’s use of double coupons is firm A’s best response to Firm B’s lowering price 10%. 2) The author of the chapter on the beer industry believes that the leading firms in that industry do not collude. The author of the cigarette chapter believes that firms in that industry do tacitly collude. What is the basis for each belief? (4 points each) Cigarettes: there is clear evidence of price leadership; the firms sell at identical prices; profits are exceptionally high. (4 points for any one of these.) Beer: prices are changed at different times and by different amounts; prices are not identical; profits do not seem unusually high. (4 points for any of these.) Any other explanations presented in the chapter are also OK. 3) If demand for a homogeneous product can be written as P = 70-Q where Q is the sum of the output of two firms, A and B, and if each firm has no fixed costs, but marginal costs of 10, calculate the Cournot equilibrium prices that would prevail in the industry. $30. 4 points for setting up the reaction curves for each firm: for firm A, MR = 70-2q a -qb = 10. Similarly for firm B. 2 points for solving the two reaction curves simultaneously to get q a = q b = 20. 2 points for saying P = 70 -20 -20 = 30. 4) There are several different kinds of price leadership, among them collusive price leadership,
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This note was uploaded on 03/30/2008 for the course ECON 460 taught by Professor Boyer during the Spring '08 term at Michigan State University.

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midterm_2_460_Fall_07_Boyer_answers - Your name: _ MICHIGAN...

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