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Unformatted text preview: ˇ Copiˇ c, Ec101, Fall 2010, Practice Midterm 2, 11/22/2010. There are 14 questions. You will have 60 minutes to answer them on the real midterm (and there will also be 2 extra credit questions). I suggest you also use the same time limit for the practice exam. The questions have appropriate indications as to whether they are easy, medium, or hard. (Questions that may have multiple correct answers are indicated). Note: on the real exam each question will have only one correct answer. Problem 1. (easy) There are two firms in a market with a linear demand curve. Which of the following is incorrect? a. A monopolist produces a smaller quantity than is produced under quantity competi- tion. b. In a duopoly situation, the quantity produced under price competition is smaller than under quantity competition. c. Under duopoly, consumers are best off under price competition. d. If the costs of the two firms are different, then under quantity competition, the one with lower cost produces more. Problem 2. (easy) There is one firm with a constant marginal cost of producing a good, c . The demand is linear, given by Q = K- P , where K > c > 0. The production goes on only for one period. Suppose the firm had an option to improve the production for some fee f , and thus lower the marginal cost to c < c . Which of the following is true? a. The firm would always improve the production. b. The firm would improve the production as long as f < c c. The firm would improve the production as long as f < ( c- c ) 2 d. The firm would improve the production as long as f < 1 4 (2 K- c- c )( c- c ) Problem 3. (medium/hard) Under the same condition as in problem 2, suppose that there is the second firm with the cost c , and the two firms are engaged in quantity competition. Now each of them can improve their production by paying the fee f . Suppose the firms simultaneously decide whether to improve the production or not. Then they both observe the improvement decisions, and simultaneously choose their production levels. Which of the following is true now for a subgame-perfect Nash equilibrium of this game? 1 a. If f < ( c- c ) 2 then both will improve production. b. Either both will improve their production or none will. c. None of them will improve the production. d. It is in equilibrium possible that one would choose to improve the production while the other would choose not to....
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- Fall '08
- SPNE, Mark All