1. Consider the following game that is played repeatedly for an infinite amount of times.

Player 1’s discount factor equals 2/3 and Player 2’s discount factor equals 9/10. What is
the highest value of for which (Top, Left) is a subgame perfect Nash
equilibrium? (You can assume that player 2 will cooperate so you only need to check for
player 1. Also assume that when indifferent, the players choose to cooperate.).

Player 2
Left Right
Top 6,6 2,10
Player 1
Bottom 10,3 3+x,5

a. 1/2
b. 1
c. 2
d. There is no for which (Top, Left) is a Nash Equilibrium

The only movie theater in Haarlem wants to design a profit-maximizing pricing scheme. It
can set a monthly fee ( ) and a unit price consumers pay per visit ( ). Each consumer’s
monthly demand for movies is given by . The movie theater’s marginal
costs are 8. All fixed costs are sunk. What is the optimal pricing scheme?

a. Monthly fee and unit price

b. Monthly fee and unit price
c. Monthly fee and unit price .
d. Monthly fee and unit price .

3. Consider a market in which demand equals , where p denotes the price and
Q the total quantity. In this market, three firms are active. All firms have marginal costs
and zero fixed costs. In the case of Bertrand competition, the collusive price is
equal to:

a.
b.
c.
d.
4. In a vertical chain, downstream retailers may free ride on competing retailers offering
post-sales services. Which of the following contractual agreements could alleviate the
resulting free-riding problem?

a. Resale price maintenance

b. An exclusive dealing contract
c. An exclusive territories contract
d. A most-favored-customer clause

5. Netflix offers its content for free for the first month to new customers. HBO, a competitor
in the market for video on-demand, notifies the competition authority accusing Netflix of
predatory pricing. According to the competition authority’s policy, prices are illegal if they
satisfy the Areeda-Turner rule. Netflix defends its strategy by arguing that its offer is part
of its marketing strategy. Which of the following statements are true?

I In legal applications of the Areeda-Turner rule, the short-run average costs are usually
taken as a proxy for the short-run marginal costs.
II A weakness of the Areeda-Turner rule is that firms may sell products for prices below
marginal costs as part of a sensible marketing strategy without intending to drive a
competitor out of the market.

a. Both I and II are true

b. I is true and II is false
c. I is false and II is true
d. Both I and II are false

6. A nobleman in the 15th century wanted to get his family tree transcribed by some
university students. In his city there were two types of students: the Fast ones, who could
transcribe 9 pages per hour, and the Lazy ones, who could transcribe only 4 pages per
hour. Instead of being employed as a reproducer, the Fast types could earn 27 silver coins
per hour by working in one of the city’s workshops, and the Lazy ones could harvest the
crop, earning 14 silver coins per hour. Assume that the nobleman could not observe the
students’ types. Which bonus per page would he pay to make sure that only Fast types
would accept the job? (There is no fixed wage and no effort costs. If a worker is indifferent,
he will accept the nobleman’s offer).

a.
b.
c.
d. No exists for which only Fast types would accept the job
7. Consider a market in which demand equals , where denotes the price.
Two companies compete à la Stackelberg. The leader produces with constant marginal
cost equal to 10 and the follower produces with constant marginal cost equal to 40.
Assuming that the follower will enter the market, what is the outcome in the subgame
perfect Nash equilibrium?

a. The market leader produces 110, the follower 55

b. The market leader produces 100, the follower 40
c. The market leader produces 110, the follower 25
d. Both the market leader and the follower produce 110

8. Which of the following statements are true?

I. The incentive intensity principle states that in the case of a risk-averse agent, the
optimal intensity of incentives is higher the more precisely performance can be
measured.
II. In the case of a risk-neutral principal and a risk-averse agent, the principal should
share at least some of the risk with the agent.

a. Both I and II are true

b. I is true and II is false
c. I is false and II is true
d. Both I and II are false

9. Suppose your firm finds an applicant for a job who is highly productive with probability
and less productive with probability . A highly productive worker contributes 18,000 to
the firm’s profits, while a less productive worker contributes 12,000. The job’s wage
equals 14,000 and workers are hired for one period only. The firm considers organizing
an assessment. Suppose the assessment allows the firm to learn the productivity of the
worker with certainty, so that the firm only hires if the worker is of the highly-productive
type. What is the highest cost the firm is willing to pay to organize an assessment?
Assume that when indifferent, the firm will not organize an assessment. If the firm does
not hire this worker, they will not hire anyone in that period.

a.
b.
c.
d.
10. The city of London wishes to improve competition in the market for magic wands. To
reach this target, the city sells a new market license using the English auction. If incumbent
Ollivanders Wand Shop obtains the license in the auction, it will realize monopoly profits
equal to 5. If potential entrant The Wizard of Oz wins, Ollivanders’ duopoly profits will be
2 while The Wizard’s duopoly profits will be 2. Who will win the auction at what price?
(Assume that when indifferent, the companies do not bid).

a. The Wizard of Oz will win at a price of 2

b. Ollivanders Wand Shop will win at a price of 2
c. Ollivanders Wand Shop will win at a price of 3
d. Ollivanders Wand Shop will win at a price of 5

11. Consider a market in which demand equals , where p denotes the

price and Q total supply and where 2 companies are active. Company 1 has the following
total cost function: . Company 2 has the following total cost function:
. The firms compete à la Cournot. Which quantity does company 1
produce in equilibrium?

a.

b.

c.

d.

12. Consider a market in which demand equals , where denotes the price.
There is currently one company in the market (the leader). A second company is
considering whether to enter the market (the follower). Both companies produce with
constant marginal costs equal to 9. If the follower wants to enter the market, he has to
pay a fixed cost of 625. How much does the leader have to produce to keep the follower
from entering (assuming the follower enters when indifferent)?

a.
b.
c.
d.
13. Which of the following statements are true?

I. A higher Nash equilibrium payoff decreases the critical (cutoff) discount factor
II. Dan Ariely and his colleagues ran experiments to test the effect of high bonuses on
performance. Their main conclusion is that very high bonuses decrease performance in
cognitive tasks.

a. Both I and II are true

b. I is true and II is false
c. I is false and II is true
d. Both I and II are false

14. How many Nash equilibria in pure strategies does the following game have?

Column

Left Center Right

Top 3,3 1,3 0,1

Row Middle 1,1 0,3 1,0

Bottom 3,1 1,1 0,0

a. 1
b. 2
c. 3
d. 4

15. Consider a repeated game where in each period, there is a 30% chance that the
interaction finishes in the current period. Assume that the discount factor that a player
faces only depends on the interest rate and the probability that the interaction finishes.
What is the player’s discount factor if the interest rate equals =6%?

a. =0.37
b. =0.48
c. =0.56
d. =0.66
16. A monopoly operates in a market with demand equal to . The monopoly
has constant marginal cost of production of 2 and fixed costs of 100. How high is consumer
surplus in an unregulated market and how high is consumer surplus if the government
caps the price at 10.

a. Unregulated: 102. Regulated: 54.

b. Unregulated: 0. Regulated: 200.
c. Unregulated: 98. Regulated 0.
d. Unregulated: 98. Regulated: 200.

17. Consider a market in which demand equals , where p denotes the

price and Q total supply and where 2 companies are active. Both have constant marginal
costs of 3 and compete à la Cournot. What would be the change in price in this market if
the government subsidizes each unit sold by 1.5?

a. –2
b. –1
c. 0
d. 1

18. Consider the Hotelling model. The market is populated by two firms, each offering a
product at one extreme of a line of length 1. Both firms produce at a constant marginal
cost . The firms’ products are homogeneous. Consumers are willing to buy at most
one unit of the product to which they assign value 12. 1000 consumers are uniformly
distributed over the line. Consumers face travel costs equal to when they buy at the
firm that is distance away from their location. The company on the left charges
and the company on the right charges . How many consumers will choose the firm
on the left?

a.
b.
c.
d.
19. Which of the following statements about anti-cartel law are true?

I According to the Treaty of the Functioning of the European Union, anti-cartel law may
be declared inapplicable in the case of agreements between firms related to R&D
activities
II Tacit collusion is illegal in most developed countries according to anti-cartel law

a. Both I and II are true

b. I is true and II is false
c. I is false and II is true
d. Both I and II are false

20. Imagine a market with a single producer who has a constant marginal cost of 10 and no
fixed costs. Demand is equal to . What is the Lerner index of this
market?

a. 1/2
b. 2/3
c. 1
d. 2