1.

In the following table, the first number in each cell represents player 1’s payoff, and the
second number represents player 2’s payoff. Which of the following is NOT a Nash
equilibrium?

Player 2
Left Right
Up 2,0 0,0
Player 1
Down 1,4 0,4

a. Up, Left
b. Up, Right
c. Down, Left
d. Down, Right

2. Which of the following statements are true about the public goods game?

I. In the one-shot version of the game without the punishment option, the Nash
equilibrium is every player contributing nothing.
II. Fehr and Gächter (AER 1999)’s experiment finds that if the public goods game is
repeated and if players can punish other players, players contribute higher
amounts on average.

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

3. Assume that Canon is a monopolist producer of memory cards for cameras. Canon
produces at a zero marginal cost and sells each memory card at a price of 𝑃𝐶 to Sony.
Sony has a monopoly over the assembly of cameras, each of which is equipped with a
Canon memory card. Sony’s marginal cost of producing a camera, including the price of
a memory card paid to Canon, is 𝑃𝐶 + 1000. The demand for Sony’s cameras is given
by Q=50 − 0.01𝑃, where Q is quantity and P is the price of Sony’s camera. Given 𝑃𝐶 ,
what price P would Sony set to maximize its profit?

a. 3000+0.5𝑃𝐶
b. 2000+𝑃𝐶
c. 1500-0.5𝑃𝐶
d. 1500+0.5𝑃𝐶

4. Consider a market in which two or more firms compete a la Bertrand. Assume that
all firms interact only once and face the same marginal costs. All consumers buy at the
firm(s) with the lowest price. If more than one firm choose the same lowest price, they
divide the demand equally. Which of the following statements are true about Bertrand
competition?

I. Compared to Cournot competition, Bertrand competition makes a more suitable

 model of oligopoly for industries with little capacity constraints, for example,
software, insurance, or bank services.
II. If each firm can serve the entire demand at any price, then the Nash equilibrium
price falls as the number of firms increases.

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

5. Consider a market with a demand function Q=100-p, where Q is the quantity and p is
the price. 𝐿𝑀 , 𝐿𝑃𝐶 , and 𝐿𝐶𝑜𝑢𝑟𝑛𝑜𝑡 respectively denote the Lerner indices in the market
equilibrium under monopoly, perfect competition, and Cournot duopoly (two firms
competing in quantities). Each firm has a constant marginal cost equal to 20. Which of
the following is correct?

a. 𝐿𝑀 < 𝐿𝑃𝐶 < 𝐿𝐶𝑜𝑢𝑟𝑛𝑜𝑡

b. 𝐿𝑀 < 𝐿𝐶𝑜𝑢𝑟𝑛𝑜𝑡 < 𝐿𝑃𝐶
c. 𝐿𝐶𝑜𝑢𝑟𝑛𝑜𝑡 < 𝐿𝑀 < 𝐿𝑃𝐶
d. 𝐿𝑃𝐶 < 𝐿𝐶𝑜𝑢𝑟𝑛𝑜𝑡 < 𝐿𝑀

6. Which of the following is NOT one of the four pillars of EU competition policy?

a. Anti-cartel law
b. Merger control
c. (Prohibition of) State aid
d. Rate-of-return regulation

7. An insurance company offers its salespeople the following incentive schemes:

Scheme 1: Fixed wage €50 and a commission of 10% on every sale they make above
€2000 per day.
Scheme 2: Fixed wage €100 and a commission of 20% on every sale they make above
€4000 per day.

Scheme 1 is preferred to Scheme 2 by a salesperson who sells:

a. 1750 per day

b. 2250 per day
c. 3000 per day
d. 6000 per day

8. Willy, the owner of a chocolate factory offers Charlie a linear contract with a fixed
wage 𝑤 and a bonus 𝛽 for each bar of chocolate produced. The number of chocolate
bars produced by Charlie (𝑄) is equal to his effort ( 𝑒 ). Each bar of chocolate is
produced at zero marginal costs and sold at a price of 3. Charlie’s utility is 𝑈 = 𝑤 +
𝑒2
𝛽𝑄 − 2 . The optimal bonus 𝛽 that results in the efficient (i.e. maximizes the total value
generated by the contract) effort level is:
a. 1.5
b. 2
c. 2.5
d. 3

9. In the case of a risk-neutral principal and a risk-averse agent, which of the following
statements is true about the contract that is optimal from the principal’s perspective?

I. The incentive intensity principle implies that if performance can be measured more
precisely, the intensity of the incentives should be higher.
II. The principal shares 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

10. Which of the following statements is true?

I. According to Goodhart’s law, a precise measure of performance also makes an

optimal performance target.
II. Holmstrom and Milgrom (1991) show that if the agents perform multiple tasks,
fixed-wage contracts might be optimal.

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

11. Consider the following game that is played repeatedly for an infinite number of
times. Both players have the same discount factor 𝛿 = 0.6. X represents the payoff for
each player if they cooperate on the outcome (Top, Left). The two players can sustain
cooperation on (Top, Left) by using trigger strategies if:

Player 2
Left Right
Top X,X 2,8
Player 1
Bottom 8,2 4,4

a. X=4.5
b. X=5
c. X=5.5
d. X=6

12. Two cafes, Coffee Bucks and Star Company, are competing a la Cournot. They face
the demand curve 𝐷(𝑝) = 960 − 240𝑝 and the same marginal cost per cup of coffee:
𝑀𝐶 = 1.75. Fixed costs are sunk and can be ignored. The following graph shows the
reaction curves of the two cafes. 𝑞𝑐 , 𝑞𝑠 , and 𝑞𝑚 respectively denote Coffee Bucks’
quantity, Star Company’s quantity, and the profit-maximizing quantity of a monopolist
firm. Which of the following statements is true?

a. Point B represents collusive quantities.

b. At point B, the two cafes earn the highest possible joint profit.
c. Point D represents the Nash equilibrium quantities.
d. If the two cafes produce at point D, Star Company has an incentive to deviate to the
quantity marked by point E.

13. Which of the following is NOT a practice that facilitates collusion?

a. Mergers
b. Lowest price guarantees
c. Most-favored customer clauses
d. Intransparent prices

14. Which of the following is NOT an advantage of vertical integration?

a. Avoiding double marginalization

b. Avoiding holdup problems
c. Foreclosing competitors
d. Economies of scale

15. Which of the following statements is true?

I. Technological leadership is a first-mover advantage

II. Resolution of market/technological uncertainty is a second-mover advantage

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

16. Consider a market in which demand equals 𝐷 (𝑝) = 140 – 𝑝, where 𝑝 denotes the
price. Two companies compete on quantity à la Stackelberg. Both the leader and the
follower firms produce at a constant marginal cost of 20. Assuming that the follower
firm enters the market. What is the market price in the subgame perfect Nash
equilibrium?

a. 35
b. 40
c. 45
d. 50

17. Billie is interested in purchasing a second-hand car from Taylor. Suppose that
Taylor can exert effort e to customize the car to Billie’s specific needs. In that case, the
value of the car for Billie is v = 12e and the cost of effort for Taylor is 𝑒 2 . Once the car
is customized, Taylor cannot sell this car to anyone else and the value of the car to
Taylor is zero. Suppose that Billie promises to pay Taylor a price 𝑝 such that they will
split the gains of trade exactly half-half. Which of the following statements is true?

I. The socially efficient level of effort is e = 6.

II. Unless Billie commits not to renegotiate the price, her promise to pay 𝑝 to Taylor is
not credible.

a. Both I and II are true

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

18. A technology startup wants to hire a developer for its two-year project. All
developers are either the good type or the bad type. The firm can observe the type only
after working with the developer for a year. The firm offers a starting salary of X for the
first year. If the developer is the good type, the firm offers one more year of contract at
a higher salary of 80,000. If the developer is the bad type, the firm will not extend the
contract after the first year. For each year a developer does not work for the firm, the
developer can work for another firm that pays 60,000 per year regardless of the type.
Assume that all developers care only about the total earnings for the next two years.
Only the good type developers will accept the offer from the startup if the starting
salary X is equal to:

a. 10,000
b. 30,000
c. 50,000
d. 70,000

19. EMObile, a monopolist supplier of mobile phone plans, is considering a non-linear

pricing scheme consisting of a fixed fee 𝑓 and a price 𝑝 per minute. All potential clients
have the same demand curve as shown in the figure below. The figure shows the
marginal revenue (MR) and the marginal cost (MC) of the firm as well. Which 𝑓 and 𝑝
should EMObile choose to maximize its profits?
 𝑞𝐵 (𝑝𝐴 −𝑝𝐵 )
a. 𝑓 = , 𝑝 = 𝑝𝐵
2
b. 𝑓 = 𝑞𝐵 (𝑝𝐵 − 𝑝𝐶 ) , 𝑝 = 𝑝𝐵
𝑞𝐶 (𝑝𝐴 −𝑝𝐶 )
c. 𝑓 = , 𝑝 = 𝑝𝑐
2
d. 𝑓 = 0 , 𝑝 = 𝑝𝑐

20. A software company offers two software products to the market: a word processor (W)
and a spreadsheet (S). The table below shows the maximum prices that various consumer
types are willing to pay for W and S. When consumers are indifferent, they pick the more
expensive option. Assume zero marginal costs for all products. Which pricing scheme
results in the highest profit for the company?

Willingness to pay
Customer type Number Word processor Spreadsheet
(million) (W) (S)
Writer 5 100 0
Analyst 5 0 100
General user 3 70 70

a. Price W = 100; price S = 100; no offer of package product

b. Price W = 100; price S = 100; price package W and S = 140
c. Price W = 70; price S = 70; no offer of package product
d. Price W = 70; price S = 70; price package W and S = 100