Quiz 4: Answers
1. In the following game with simultaneous moves, Firm 1 and Firm 2 must decide whether
to advertise (Y) or not advertise (N):
Firm 2
Firm 1
Y
N
Y
30 , 30
75 , 10
N
10 , 75
50 , 50
The NASH equilibrium of this game is
a) (Y, Y)
b) (Y, N)
c

PROBLEM:
You are the manager of a business in a competitive market and your production technology
is described by the total cost function
C(q) = 150 + 5q +
1 2
q
10
In addition, assume the market price is p = 15 dollars.
a) Determine the optimal quantity

PROBLEM:
Game Theory
Firm 1 and Firm 2 compete in an industry and must decide whether to introduce an
upgrade to their existing products. The nature of the strategic interaction is described by
the game box, where (Y) means upgrade and (N) means do not up

PROBLEM:
You are the manager of the surgery department at a hospital which serves mostly
Medicare patients. The hospital performs 1,000 surgical operations per year using the
traditional method. The Medicare payment for a surgical operation using the trad

PROBLEM:
Pricing Strategies
A business can produce its product in different versions: Version A has a basic
design and a lower cost and Version B has an upgraded design and a higher cost
of production. The business knows there are different types of custo

PROBLEM:
Assume the market for a commodity is described by the demand and supply functions
2
p
3
Demand:
q = 30
Supply:
q = 2p 10
a) Determine the equilibrium price and quantity in this market.
b) Derive the inverse demand and supply functions, draw a gr

PROBLEM:
Monopoly
You are the manager of a business in a monopoly market with the following inverse
demand function
1
p = 30
q
10
In addition, assume your production technology is described by the total cost function
C(q) = 500 10q
a) Determine the optim

Quiz 3: Answers
1. Specialized investments tend to
a) Increase transaction costs because of costly bargaining
b) Decrease transaction costs because of opportunism
c) Decrease transaction costs associated with costly bargaining
d) Decrease transaction cost