ECON201FinalReviewAnswers

ECON201FinalReviewAnswers - W ELLESLEY C OLLEGE D EPARTMENT...

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WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS ECONOMICS 201-03 JOHNSON Answers to Final Exam Review Materials I. Multiple Choice 1. B 2. C 3. C 4. B 5. D 6. A 7. D 8. C 9. A 10. A 11. A 12. B 13. C 14. C 15. A 16. C 17. D A. I'm Gamey, Time for a Bath 0... 1. No dominant strategies 11. No dominated strategies 111. No pure strategy Nash equilibrium y 3/\1- b. ~ i.) A /- B~ (]~ -/ 2) tI:9 ~\3J- "'-. 1- ~)8 t\: 1 ) B:2 IS ~ ~Cd~ t:t.
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It 2. For the standard play of this game, the entrant moves first (by deciding whether to enter or not). A threat of always fighting on the part ofthe incumbent firm is not credible. Indeed, if the potential entrant enters, the incumbent is better off accommodating than fighting. (2 is greater than -2). One way to make this threat credible is to precommit to the threatened action (fight) by taking some irreversible action that the potential entrant knows can only mean a fight is imminent. The incumbent might sign long-term contracts on advertising or begin to expand capacity prior to a decision on the part of the potential entrant. Thus, these actions prior to entry might lower the costs of fighting in such a way as to raise the payoff from a fight if entry occurs. We could revise the game to change the EnterlFight cell for the incumbent fiITl} to a value greater than 2: \~L . r- f\ ") 1 2- -I , ::::: -1 o \0 0) '0 ) Now, the "fight no matter what" threat is credible, and you can verify that the Nash equilibrium here is for the entrant to stay out, and the incumbent firm always to fight.
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B. "G.B., Your Hair Smells Terrific!" a. With its production function, we know that X production will be characterized by: Lx = K x = X (always at the kink for efficiency) With total L and total K both 100, then capital and labor in Y production will be equal as well. From the production function for Y, by squaring both sides and using substitution we have: y 2 = 2L y + K y = 2( 100 - Lx) + ( 100 - K x ) = 2 ( 100 - X) + ( 100 - X) y 2 = 2 ( 100 - X ) + ( 100 - = 300 - 3X Thus, the PPF is: 3X + y 2 = 300 b. Given the utility function for everyone in the economy, we know that the MRS will equal Vz (the ratio ofthe marginal utility ofX to the marginal utility ofY). We can find the MRT using the slope of the PPF: MRT = -dY/dX along the PPF = 3/(2Y)
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Set these equal to find:
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This note was uploaded on 06/15/2010 for the course ECON 201 taught by Professor Johnson during the Fall '08 term at Wellesley College.

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ECON201FinalReviewAnswers - W ELLESLEY C OLLEGE D EPARTMENT...

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