Question 1

Version 1 A rubber manufacturer sells rubber to a manufacturer of tires. The tires are sold to
consumers. Both the rubber manufacturer and the tire company have a monopoly
position and each of them maximizes profits. This creates a double marginalization
problem. When this happens, a vertical integration between the two firms will:
a. increase total profits for the two firms and decrease consumer surplus
b. increase total profits for the two firms and increase consumer surplus
c. decrease total profits for the two firms and decrease consumer surplus
d. not affect total profits for the two forms and decrease consumer
surplus
Version 2 A steel factory sells steel to a manufacturer of tools. The tools are sold to
consumers. Both the steel factory and the tools company have a monopoly
position and each of them maximizes profits. This creates a double marginalization
problem. When this happens, a vertical integration between the two firms will:
a. increase total profits for the two firms and decrease consumer surplus
b. increase total profits for the two firms and increase consumer surplus
c. decrease total profits for the two firms and not affect consumer
surplus
d. not affect total profits for the two forms and decrease consumer
surplus
Version 3 A mill sells flower to a bakery that makes bread out of it. The bread is sold to
consumers. Both the mill and the bakery have a monopoly position and each of
them maximizes profits. This creates a double marginalization problem. When this
happens, a vertical integration between the two firms will:
a. increase total profits for the two firms and not affect consumer surplus
b. increase total profits for the two firms and increase consumer surplus
c. not affect total profits for the two firms and increase consumer surplus
d. not affect total profits for the two forms and decrease consumer
surplus
Question 2
Version 1 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 300 – 5P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 20. The monopolist has fixed cost of 600. The value of the Lerner index in this
case is given by:
a. 0.50
b. 1.20
c. 1.30
d. 1.00

Version 2 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 200 – 5P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 10. The monopolist has fixed cost of 625. The value of the Lerner index in this
case is given by:
a. 0.60
b. 0.73
c. 1.50
d. 0.50

Version 3 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 150 – 10P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 5. The monopolist has fixed cost of 220. The value of the Lerner index in this
case is given by:
a. 0.50
b. 1.20
c. 1.80
d. 1

Version 4 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 150 – 20P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 5. The monopolist has fixed cost of 120. The value of the Lerner index in this
case is given by:
a. 0.20
b. 1.20
c. 0.64
d. 0.25
Question 3
Version 1 Consider a market with just two firms and a demand function Q=50-2p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 5.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

Version 2 Consider a market with just two firms and a demand function Q=45-p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 9.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

Version 3 Consider a market with just two firms and a demand function Q=50-2p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 5.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

Version 4 Consider a market with just two firms and a demand function Q=30-2p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 6.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices
Question 4
Version 1 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 2.40.
Anton’s utility is given by where w is his wage. Barbara dislikes
working less than Anton, and her utility of working is given by . Sally
uses a linear incentive contract, that consists of a fixed base wage and a bonus
for each ice cream that the worker sells. The optimal bonuses that result in the
efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

Version 2 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 2.10.
Anton’s utility is given by where w is his wage. Barbara dislikes
working less than Anton, and her utility of working is given by . Sally
uses a linear incentive contract, that consists of a fixed base wage and a bonus
for each ice cream that the worker sells. The optimal bonuses that result in the
efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

Version 3 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 2.70.
Anton’s utility is given by where w is his wage. Barbara dislikes
working more than Anton, and her utility of working is given by .
Sally uses a linear incentive contract, that consists of a fixed base wage and a
bonus for each ice cream that the worker sells. The optimal bonuses that result
in the efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

Version 4 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 3.60.
Anton’s utility is given by where w is his wage. Barbara dislikes
working less than Anton, and her utility of working is given by . Sally
uses a linear incentive contract, that consists of a fixed base wage and a bonus
for each ice cream that the worker sells. The optimal bonuses that result in the
efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara
Question 5
Version 1 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=50. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
candle is:
a.
b.
c.
d.

Version 2 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=50. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
unit of wax is:
a.
b.
c.
d.

Version 3 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=20. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
candle is:
a.
b.
c.
d.

Version 4 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=20. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
unit of wax is:
a.
b.
c.
d.
Question 6
Version 1 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Average productivity of workers was higher under the piece rate scheme.
II. The evidence points to collusion between workers as an explanation for the
difference in average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 2 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Average productivity of workers was lower under the piece rate scheme.
II. The evidence points to collusion between workers as an explanation for the
difference in average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 3 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Average productivity of workers was higher under the piece rate scheme.
II. The evidence points to pure altruism as an explanation for the difference in
average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 4 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Total productivity of workers was higher under the piece rate scheme.
II. The evidence excludes collusion between workers as an explanation for the
difference in average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false
Question 7
Version 1 Mary wants to hire Alexander to work for her. Alexander is risk neutral, dislikes
working, has no budget constraints, and his outside option is zero. Mary offers him
a linear contract that has a fixed wage and a bonus for each unit of output. Mary
maximizes her profits. Consider the following two statements:

I. If Mary wants to maximize her own profits, she should set the bonus such that
Alexander’s effort maximizes the total value (Mary’s profits plus Alexander’s utility)
II. The fixed wage should be negative (below Alexander’s outside option)

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 2 Max wants to hire Alison to work for him. Alison is risk neutral, dislikes working,
has no budget constraints, and her outside option is zero. Max offers her a linear
contract that has a fixed wage and a bonus for each unit of output. Max maximizes
his profits. Consider the following two statements:

I. If Max wants to maximize his own profits, he should set the bonus such that
Alison’s effort maximizes the total value (Max’s profits plus Alison’s utility)
II. The fixed wage should be above Alison’s outside option

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 3 Mary wants to hire Alexander to work for her. Alexander is risk neutral, dislikes
working, has no budget constraints, and his outside option is zero. Mary offers him
a linear contract that has a fixed wage and a bonus for each unit of output. Mary
maximizes her profits. Consider the following two statements:

I. If Mary sets the bonus such that Alexander’s effort maximizes the total value
(Mary’s profits plus Alexander’s utility), then Mary’s profits are maximized
II. The fixed wage should be equal to Alexander’s outside option

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false
Question 8
Version 1 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
4,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 50% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 2,000
c. 3,000
d. 4,000

Version 2 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
6,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 50% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 3,000
c. 4,500
d. 6,000

Version 3 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
4,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 25% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 2,000
c. 2,500
d. 4,000

Version 4 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
6,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 25% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 3,000
c. 3,750
d. 6,000
Question 9
Version 1 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 100 450 950
Singles 150 400 500

a. 399 for model E1000 and 949 for model E1400

b. 399 for model E1000 and 889 for model E1400
c. 449 for model E1000 and 499 for model E1400
d. 499 for model E1000 and 949 for model E1400

Version 2 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 200 450 950
Singles 300 400 500

a. 399 for model E1000 and 949 for model E1400

b. 399 for model E1000 and 889 for model E1400
c. 449 for model E1000 and 499 for model E1400
d. 499 for model E1000 and 949 for model E1400

Version 3 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
 stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 100 750 1,150
Singles 150 600 800

a. 699 for model E1000 and 1,149 for model E1400

b. 599 for model E1000 and 989 for model E1400
c. 749 for model E1000 and 749 for model E1400
d. 599 for model E1000 and 1,149 for model E1400

Version 4 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 200 750 1,150
Singles 250 600 800

a. 699 for model E1000 and 1,149 for model E1400

b. 599 for model E1000 and 989 for model E1400
c. 749 for model E1000 and 749 for model E1400
d. 599 for model E1000 and 1,149 for model E1400
Question
10
Version 1 Look at the figure below, which depicts a market with an incumbent (Star Company)
and a potential entrant (Coffee Bucks). The incumbent acts as a Stackelberg leader.
The situation in the figure reflects:

a. Blockaded entry
b. Entry deterrence
c. Entry accommodation
d. Blockaded deterrence

Version 2 Look at the figure below, which depicts a market with an incumbent (Star Company)
and a potential entrant (Coffee Bucks). The incumbent acts as a Stackelberg leader.
The situation in the figure reflects:

a. Blockaded entry
b. Entry deterrence
c. Entry accommodation
d. Blockaded deterrence

Version 3 Look at the figure below, which depicts a market with an incumbent (Star Company)
and a potential entrant (Coffee Bucks). The incumbent acts as a Stackelberg leader.
The situation in the figure reflects:
a. Blockaded entry
b. Entry deterrence
c. Entry accommodation
d. Blockaded deterrence
Question 11
Version 1 The demand function on a market is . There are four firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

Version 2 The demand function on a market is . There are eight firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

Version 3 The demand function on a market is . There are four firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

Version 4 The demand function on a market is . There are eight firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any
Question 12
Version 1 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 84. Assume that the probability that individual (
) wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 12
b. 14
c. 18
d. 21

Version 2 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 60. Assume that the probability that individual (
) wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 12
b. 14
c. 18
d. 15

Version 3 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 72. Assume that the probability that individual (
) wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 36
b. 18
c. 22
d. 9

Version 4 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 64. Assume that the probability that individual (
) wins the prize equals:
How much effort does each worker exert in equilibrium?

a. 12
b. 32
c. 16
d. 8
Question 13
Version 1 Consider a market in which demand equals , where denotes the
price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 8. The follower produces with constant
marginal costs equal to 2. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 55, the follower 55

b. The market leader produces 54, the follower 27
c. The market leader produces 48, the follower 24
d. The market leader produces 48, the follower 30

Version 2 Consider a market in which demand equals , where denotes the

price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 4. The follower produces with constant
marginal costs equal to 2. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 55, the follower 20

b. The market leader produces 49, the follower 24.5
c. The market leader produces 46, the follower 23
d. The market leader produces 46, the follower 25

Version 3 Consider a market in which demand equals , where denotes the

price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 5. The follower produces with constant
marginal costs equal to 3. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 27.5, the follower 13.75

b. The market leader produces 27.5, the follower 27.5
c. The market leader produces 24, the follower 12
d. The market leader produces 24, the follower 14

Version 4 Consider a market in which demand equals , where denotes the

price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 3. The follower produces with constant
marginal costs equal to 1. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 32.5, the follower 32.5

b. The market leader produces 32.5, the follower 16.25
c. The market leader produces 30, the follower 15
d. The market leader produces 30, the follower 17
Question 14
Version 1 Which of the following statements are true?

I. Copyright laws increase the market power of content creators

II. Switching costs are a source of first-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

Version 2 Which of the following statements are true?

I. Investing in overcapacity can create a first-mover advantage

II. Switching costs are a source of first-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

Version 3 Which of the following statements are true?

I. Copyright laws increase the market power of content creators

II. Search costs are a source of first-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

Version 4 Which of the following statements are true?

I. Copyright laws increase the market power of content creators

II. Technological leadership is a source of first-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
Question 15
Version 1 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2 P2
Game 1 Game 2
Left Right Left Right

Top 6,6 3,7 Top 8,3 5,2

P1 P1
Bottom 7,3 4,4 Bottom 5,2 1,1

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left

Version 2 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2 P2
Game 1 Game 2
Left Right Left Right

Top 5,5 2,7 Top 0,0 5,2

P1 P1
Bottom 7,2 4,4 Bottom 5,2 8,4

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left

Version 3 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2
Game 1
Left Right
 Top 6,5 2,7 P2
P1 Game 2
Bottom 7,2 3,3 Left Right

a. Game 1: Bottom, Right Top 0,0 5,2

b. Game 1: Top, Left P1
c. Game 2: Bottom, Right Bottom 1,2 8,4
d. Game 2: Top, Left

Version 4 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2 P2
Game 1 Game 2
Left Right Left Right

Top 8,7 2,5 Top 0,0 5,2

P1 P1
Bottom 7,6 4,4 Bottom 5,2 6,4

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left
Question 16
Version 1 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 6+x,6 2,10
Player 1
Bottom 8,3 3,5

Assume that 0<x<2. Consider the following statements:

I An increase in x decreases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation

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

Version 2 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 6,6 2,10
Player 1
Bottom 8,3 3+x,5

Assume that x>0. Consider the following statements:

I An increase in x decreases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation

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

Version 3 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).
 Player 2
Left Right
Top 5+x,6 2,10
Player 1
Bottom 8,3 3,5

Assume that 0<x<3. Consider the following statements:

I An increase in x decreases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation

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

Version 4 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 4+x,6 2,10
Player 1
Bottom 8,3 3,5

Assume that 0<x<4. Consider the following statements:

I An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation

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
Question 17
Version 1 A profit maximizing monopolist sells orchids. There are 100 identical consumers,
and each consumer has a demand function that is given by Q = 300 – p. The
marginal cost of raising an orchid equals 30. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be maximized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be maximized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 2 A profit maximizing monopolist sells orchids. There are 200 identical consumers,
and each consumer has a demand function that is given by Q = 320 – p. The
marginal cost of raising an orchid equals 20. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be minimized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be maximized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 3 A profit maximizing monopolist sells orchids. There are 100 identical consumers,
and each consumer has a demand function that is given by Q = 400 – p. The
marginal cost of raising an orchid equals 35. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be maximized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be maximized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

Version 4 A profit maximizing monopolist sells orchids. There are 100 identical consumers,
and each consumer has a demand function that is given by Q = 600 – p. The
marginal cost of raising an orchid equals 40. Consider the following two
statements:
I. If the monopolist can engage in first degree price discrimination, welfare
(consumer surplus plus producer surplus) will be maximized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be minimized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false
Question 18
Version 1 In the world market for smartphones, Samsung, Apple, Huawei, and LG are the four
biggest suppliers with market shares of 30%, 30%, 10%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.22
c. 0.19
d. 0.26

Version 2 In the world market for smartphones, Samsung, Apple, and Huawei are the three
biggest suppliers with market shares of 30%, 30%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.22
c. 0.19
d. 0.26

Version 3 In the world market for smartphones, Samsung, Apple, Huawei, and LG are the four
biggest suppliers with market shares of 40%, 30%, 10%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.27
c. 0.24
d. 0.26

Version 4 In the world market for smartphones, Samsung, Apple, and Huawei are the three
biggest suppliers with market shares of 40%, 30%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.22
c. 0.24
d. 0.26
Question 19
Version 1 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?

a. The higher the barriers to entry, the higher the critical discount factor
b. The more demand is expected to increase in the future, the higher the critical
discount factor
c. The higher the frequency of interaction, the lower the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor
Version 2 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?

a. The higher the barriers to entry, the lower the critical discount factor
b. The more demand is expected to increase in the future, the higher the critical
discount factor
c. The higher the frequency of interaction, the higher the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor

Version 3 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?
a. The higher the barriers to entry, the higher the critical discount factor
b. The more demand is expected to increase in the future, the lower the critical
discount factor
c. The higher the frequency of interaction, the higher the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor

Version 4 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?

a. The higher the barriers to entry, the higher the critical discount factor
b. The more demand is expected to decrease in the future, the higher the critical
discount factor
c. The higher the frequency of interaction, the higher the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor
Question 20
Version 1 Consider a monopolist that operates in a market with demand
. The monopolist has a constant marginal cost of 6 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 16?

a. Total welfare increases by 1200

b. Total welfare increases by 600
c. Total welfare increases by 300
d. Total welfare decreases by 600

Version 2 Consider a monopolist that operates in a market with demand

. The monopolist has a constant marginal cost of 2 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 16?

a. Total welfare increases by 870

b. Total welfare increases by 630
c. Total welfare increases by 340
d. Total welfare decreases by 630
Version 3 Consider a monopolist that operates in a market with demand
. The monopolist has a constant marginal cost of 2 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 12?

a. Total welfare increases by 918

b. Total welfare increases by 622
c. Total welfare increases by 344
d. Total welfare decreases by 622
Version 4 Consider a monopolist that operates in a market with demand
. The monopolist has a constant marginal cost of 4 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 12?

a. Total welfare increases by 1650

b. Total welfare increases by 850
c. Total welfare increases by 375
d. Total welfare decreases by 850
Question 1
Version 1 A rubber manufacturer sells rubber to a manufacturer of tires. The tires are sold to
consumers. Both the rubber manufacturer and the tire company have a monopoly
position and each of them maximizes profits. This creates a double marginalization
problem. When this happens, a vertical integration between the two firms will:
a. increase total profits for the two firms and decrease consumer surplus
b. increase total profits for the two firms and increase consumer surplus
c. decrease total profits for the two firms and decrease consumer surplus
d. not affect total profits for the two forms and decrease consumer
surplus

Vertical integration will increase profits and increase consumer surplus. See p. 101
of the book.
Version 2 A steel factory sells steel to a manufacturer of tools. The tools are sold to
consumers. Both the steel factory and the tools company have a monopoly
position and each of them maximizes profits. This creates a double marginalization
problem. When this happens, a vertical integration between the two firms will:
a. increase total profits for the two firms and decrease consumer surplus
b. increase total profits for the two firms and increase consumer surplus
c. decrease total profits for the two firms and not affect consumer
surplus
d. not affect total profits for the two forms and decrease consumer
surplus

Vertical integration will increase profits and increase consumer surplus. See p. 101
of the book.
Version 3 A mill sells flower to a bakery that makes bread out of it. The bread is sold to
consumers. Both the mill and the bakery have a monopoly position and each of
them maximizes profits. This creates a double marginalization problem. When this
happens, a vertical integration between the two firms will:
a. increase total profits for the two firms and not affect consumer surplus
b. increase total profits for the two firms and increase consumer surplus
c. not affect total profits for the two firms and increase consumer surplus
d. not affect total profits for the two forms and decrease consumer
surplus

Vertical integration will increase profits and increase consumer surplus. See p. 101
of the book.
Question 2
Version 1 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 300 – 5P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 20. The monopolist has fixed cost of 600. The value of the Lerner index in this
case is given by:
a. 0.50
b. 1.20
c. 1.30
d. 1.00

The Lerner index is (p-c)/p. The profit-maximizing price is given by p=40, giving a
Lerner index of 0.5.
Version 2 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 200 – 5P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 10. The monopolist has fixed cost of 625. The value of the Lerner index in this
case is given by:
a. 0.60
b. 0.73
c. 1.50
d. 0.50

The Lerner index is (p-c)/p. The profit-maximizing price is given by p=25, giving a
Lerner index of 0.5.
Version 3 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 150 – 10P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 5. The monopolist has fixed cost of 220. The value of the Lerner index in this
case is given by:
a. 0.50
b. 1.20
c. 1.80
d. 1

The Lerner index is (p-c)/p. The profit-maximizing price is given by p=10, giving a
Lerner index of 0.5
Version 4 A profit-maximizing monopolist that sells bicycle brakes faces a demand function
that is given by Q = 150 – 20P, where Q is the quantity demanded and P is the price
that it charges to consumers. The brakes are produced at a constant marginal cost
of 5. The monopolist has fixed cost of 120. The value of the Lerner index in this
case is given by:
a. 0.20
b. 1.20
c. 0.64
d. 0.25

The Lerner index is (p-c)/p. The profit-maximizing price is given by p=6.25, giving a
Lerner index of 0.2.
Question 3
Version 1 Consider a market with just two firms and a demand function Q=50-2p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 5.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

With Bertrand competition, prices will equal equal marginal cost (p=5). With
Cournot competition, prices will be above marginal cost (see also p. 87 of the book)
and so the quantity supplied is lower.
Version 2 Consider a market with just two firms and a demand function Q=45-p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 9.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

With Bertrand competition, prices will equal equal marginal cost (p=5). With
Cournot competition, prices will be above marginal cost (see also p. 87 of the book)
and so the quantity supplied is lower.
Version 3 Consider a market with just two firms and a demand function Q=50-2p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 5.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

With Bertrand competition, prices will equal equal marginal cost (p=5). With
Cournot competition, prices will be above marginal cost (see also p. 87 of the book)
and so the quantity supplied is lower.
Version 4 Consider a market with just two firms and a demand function Q=30-2p, where Q is
the quantity and p is the price. Each firm has constant marginal cost equal to 6.
Compared to Bertrand competition (competition in prices), if the firms compete in
quantities (Cournot competition) this results in:
a. A larger total quantity supplied and lower prices
b. A smaller total quantity supplied and higher prices
c. A smaller total quantity supplied and lower prices
d. A larger total quantity supplied and higher prices

With Bertrand competition, prices will equal equal marginal cost (p=5). With
Cournot competition, prices will be above marginal cost (see also p. 87 of the book)
and so the quantity supplied is lower.
Question 4
Version 1 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 2.40.
Anton’s utility is given by where w is his wage. Barbara dislikes
working less than Anton, and her utility of working is given by . Sally
uses a linear incentive contract, that consists of a fixed base wage and a bonus
for each ice cream that the worker sells. The optimal bonuses that result in the
efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

The optimal bonus is such that (see p. 113 of the book).

Version 2 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 2.10.
Anton’s utility is given by where w is his wage. Barbara dislikes
working less than Anton, and her utility of working is given by . Sally
uses a linear incentive contract, that consists of a fixed base wage and a bonus
for each ice cream that the worker sells. The optimal bonuses that result in the
efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

The optimal bonus is such that (see p. 113 of the book).

Version 3 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 2.70.
Anton’s utility is given by where w is his wage. Barbara dislikes
working more than Anton, and her utility of working is given by .
Sally uses a linear incentive contract, that consists of a fixed base wage and a
bonus for each ice cream that the worker sells. The optimal bonuses that result
in the efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

The optimal bonus is such that (see p. 113 of the book).

Version 4 Sally owns two ice cream shops, and has hired Anton and Barbara as workers. How
much ice cream they sell depends on their effort (e). The output of a worker (q)
equals that worker’s effort, so q = e. Ice cream can be sold at a price of 3.60.
Anton’s utility is given by where w is his wage. Barbara dislikes
working less than Anton, and her utility of working is given by . Sally
uses a linear incentive contract, that consists of a fixed base wage and a bonus
for each ice cream that the worker sells. The optimal bonuses that result in the
efficient effort levels are given by:
a. for Anton, and for Barbara
b. for Anton, and for Barbara
c. for Anton, and for Barbara
d. for Anton, and for Barbara

The optimal bonus is such that (see p. 113 of the book).

Question 5
Version 1 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=50. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
candle is:
a.
b.
c.
d.

The candle maker maximizes profits (300-Q)Q-pwQ-10Q. This gives the demand for
wax: Q=0.5*(300-pw-10). The profits for the wax manufacturer are then (300-2Q-
10)*Q-50Q. The profit maximizing price of wax is then 170, and the resulting price
of candles is 240.
Version 2 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=50. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
unit of wax is:
a.
b.
c.
d.

The candle maker maximizes profits (300-Q)Q-pwQ-10Q. This gives the demand for
wax: Q=0.5*(300-pw-10). The profits for the wax manufacturer are then (300-2Q-
10)*Q-50Q. The profit maximizing price of wax is then 170, and the resulting price
of candles is 240.
Version 3 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=20. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
candle is:
a.
b.
c.
d.

The candle maker maximizes profits (150-Q)Q-pwQ-10Q. This gives the demand for
wax: Q=0.5*(150-pw-10). The profits for the wax manufacturer are then (150-2Q-
10)*Q-20Q. The profit maximizing price of wax is then 80, and the resulting price of
candles is 120.
Version 4 A manufacturer of wax sells its product at a price to a candle maker. Candles
are then sold at a price to consumers. The demand for candles is given by
. The marginal cost of producing a unit of wax equals w=20. One unit of
wax is needed to make a candle. The marginal cost of producing a candle out of the
wax equals 10. Both the wax manufacturer and the candle maker are profit-
maximizing monopolists and have no fixed cost. The profit-maximizing price of a
unit of wax is:
a.
b.
c.
d.

The candle maker maximizes profits (150-Q)Q-pwQ-10Q. This gives the demand for
wax: Q=0.5*(150-pw-10). The profits for the wax manufacturer are then (150-2Q-
10)*Q-20Q. The profit maximizing price of wax is then 80, and the resulting price of
candles is 120.
Question 6
Version 1 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Average productivity of workers was higher under the piece rate scheme.
II. The evidence points to collusion between workers as an explanation for the
difference in average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 71

Version 2 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Average productivity of workers was lower under the piece rate scheme.
II. The evidence points to collusion between workers as an explanation for the
difference in average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 71

Version 3 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Average productivity of workers was higher under the piece rate scheme.
II. The evidence points to pure altruism as an explanation for the difference in
average productivity between the two schemes.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 71

Version 4 In one of the case studies, a description is given of what happened when a fruit
firm changed its compensation scheme from a comparative performance scheme
to a piece rate scheme. Consider the following two statements.

I. Total productivity of workers was higher under the piece rate scheme.
II. The evidence excludes collusion between workers as an explanation for the
difference in average productivity between the two schemes.
a. Statement I is correct, statement II is false
b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 71

Question 7
Version 1 Mary wants to hire Alexander to work for her. Alexander is risk neutral, dislikes
working, has no budget constraints, and his outside option is zero. Mary offers him
a linear contract that has a fixed wage and a bonus for each unit of output. Mary
maximizes her profits. Consider the following two statements:

I. If Mary wants to maximize her own profits, she should set the bonus such that
Alexander’s effort maximizes the total value (Mary’s profits plus Alexander’s utility)
II. The fixed wage should be negative (below Alexander’s outside option)

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 24

Version 2 Max wants to hire Alison to work for him. Alison is risk neutral, dislikes working,
has no budget constraints, and her outside option is zero. Max offers her a linear
contract that has a fixed wage and a bonus for each unit of output. Max maximizes
his profits. Consider the following two statements:

I. If Max wants to maximize his own profits, he should set the bonus such that
Alison’s effort maximizes the total value (Max’s profits plus Alison’s utility)
II. The fixed wage should be above Alison’s outside option

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 24

Version 3 Mary wants to hire Alexander to work for her. Alexander is risk neutral, dislikes
working, has no budget constraints, and his outside option is zero. Mary offers him
a linear contract that has a fixed wage and a bonus for each unit of output. Mary
maximizes her profits. Consider the following two statements:

I. If Mary sets the bonus such that Alexander’s effort maximizes the total value
(Mary’s profits plus Alexander’s utility), then Mary’s profits are maximized
II. The fixed wage should be equal to Alexander’s outside option

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

See the book p. 24

Question 8
Version 1 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
4,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 50% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 2,000
c. 3,000
d. 4,000

If Susan offers an amount p<=4000, then Peter only sells if the value is below the
price, i.e., if v<=p. The expected value is then 1.5(0.5(0+p))=3p/4. Since this is less
than p, Susan should not make any offer.
Version 2 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
6,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 50% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 3,000
c. 4,500
d. 6,000

If Susan offers an amount p<=6000, then Peter only sells if the value is below the
price, i.e., if v<=p. The expected value is then 1.5*(0.5*(0+p))=3p/4. Since this is less
than p, Susan should not make any offer.
Version 3 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
4,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 25% higher because
she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 2,000
c. 2,500
d. 4,000

If Susan offers an amount p<=4000, then Peter only sells if the value is below the
price, i.e., if v<=p. The expected value is then 1.25*(0.5*(0+p))=5p/8. Since this is
less than p, Susan should not make any offer.
Version 4 Susan’s car is broken and she is looking for another secondhand car. She spots a
nice model online, advertised by Peter, but is unable to estimate the car’s quality.
She knows that Peter’s value for the car can be anything between nothing and
6,000, and each value in that range is equally likely. Peter knows the value.
Whatever the value of the car for Peter, the value for Susan is 25% higher because
 she needs a car to get to work. Susan is risk-neutral. At most how much is she
willing to offer for the car?
a. 0
b. 3,000
c. 3,750
d. 6,000

If Susan offers an amount p<=6000, then Peter only sells if the value is below the
price, i.e., if v<=p. The expected value is then 1.25*(0.5*(0+p))=5p/8. Since this is
less than p, Susan should not make any offer.

Question 9
Version 1 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 100 450 950
Singles 150 400 500

a. 399 for model E1000 and 949 for model E1400

b. 399 for model E1000 and 889 for model E1400
c. 449 for model E1000 and 499 for model E1400
d. 499 for model E1000 and 949 for model E1400

If the E1000 sells at 399, and the E1400 at price p, then families are only willing to
buy the E1400 if 950-p>=450-399, so if p<=899. It is then easy to verify that the
prices 399 and 889 yield higher profits than any of the other combinations.
Version 2 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
 Families 200 450 950
Singles 300 400 500

a. 399 for model E1000 and 949 for model E1400

b. 399 for model E1000 and 889 for model E1400
c. 449 for model E1000 and 499 for model E1400
d. 499 for model E1000 and 949 for model E1400

If the E1000 sells at 399, and the E1400 at price p, then families are only willing to
buy the E1400 if 950-p>=450-399, so if p<=899. It is then easy to verify that the
prices 399 and 889 yield higher profits than any of the other combinations.
Version 3 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 100 750 1,150
Singles 150 600 750

a. 699 for model E1000 and 1,149 for model E1400

b. 599 for model E1000 and 989 for model E1400
c. 749 for model E1000 and 799 for model E1400
d. 599 for model E1000 and 1,149 for model E1400

If the E1000 sells at 599, and the E1400 at price p, then families are only willing to
buy the E1400 if 1,150-p>=750-599, so if p<=999. It is then easy to verify that the
prices 599 and 989 yield higher profits than any of the other combinations.
Version 4 A manufacturer of washing machines offers two types of its E series. The E1400 can
spin at a rate of 1400 and wash at temperatures of up to 90°. The E1000 is
internally the same, and equally costly to produce, but the producer limits how fast
the machine can spin to only 1000 and sets the maximum temperature to 60°.
There are two types of consumers, families and singles. The table below shows
their numbers and maximum willingness to pay for each type of washing machine.
The manufacturer cannot distinguish between the two types of consumers.
Assume that the manufacturer still has enough washing machines of each type in
stock, so that the marginal cost of producing a washing machine equals zero.
Which of the below combination of prices yields the highest profits?

Number Willingness to pay

E1000 E1400
Families 200 750 1,150
Singles 250 600 750
a. 699 for model E1000 and 1,149 for model E1400
b. 599 for model E1000 and 989 for model E1400
c. 749 for model E1000 and 799 for model E1400
d. 599 for model E1000 and 1,149 for model E1400

If the E1000 sells at 599, and the E1400 at price p, then families are only willing to
buy the E1400 if 1,150-p>=750-599, so if p<=999. It is then easy to verify that the
prices 599 and 989 yield higher profits than any of the other combinations.
Question
10
Version 1 Look at the figure below, which depicts a market with an incumbent (Star Company)
and a potential entrant (Coffee Bucks). The incumbent acts as a Stackelberg leader.
The situation in the figure reflects:

a. Blockaded entry
b. Entry deterrence
c. Entry accommodation
d. Blockaded deterrence

See p. 257 of the book

Version 2 Look at the figure below, which depicts a market with an incumbent (Star Company)
and a potential entrant (Coffee Bucks). The incumbent acts as a Stackelberg leader.
The situation in the figure reflects:

a. Blockaded entry
b. Entry deterrence
c. Entry accommodation
d. Blockaded deterrence

See p. 257 of the book

Version 3 Look at the figure below, which depicts a market with an incumbent (Star Company)
and a potential entrant (Coffee Bucks). The incumbent acts as a Stackelberg leader.
The situation in the figure reflects:
a. Blockaded entry
b. Entry deterrence
c. Entry accommodation
d. Blockaded deterrence

See p. 257 of the book

Question 11
Version 1 The demand function on a market is . There are four firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

If the firms form a cartel, they will act as a monopolist. .

. Setting leads to , and , so
each firm makes a profit of . In case a firm reneges on the cartel agreement, it
would lower its price by the smallest possible amount, capture the whole market,
and therefore make a profit close to the monopoly profit of . It is profitable for
each firm to form a cartel if , that is if .

Version 2 The demand function on a market is . There are eight firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

If the firms form a cartel, they will act as a monopolist. .

. Setting leads to , and , so
each firm makes a profit of 1 . In case a firm reneges on the cartel agreement, it
would lower its price by the smallest possible amount, capture the whole market,
and therefore make a profit close to the monopoly profit of . It is profitable for
each firm to form a cartel if , that is if .

Version 3 The demand function on a market is . There are four firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
 compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

If the firms form a cartel, they will act as a monopolist. .

. Setting leads to , and , so
each firm makes a profit of 50. In case a firm reneges on the cartel agreement, it
would lower its price by the smallest possible amount, capture the whole market,
and therefore make a profit close to the monopoly profit of 2 . It is profitable for
each firm to form a cartel if 2 , that is if .

Version 4 The demand function on a market is . There are eight firms who
interact an infinite number of periods and they do not discount the future. Each
firm has marginal cost equal to 10. The firms want to form a cartel in which they
charge the monopoly price and share profits equally. If a firm deviates, they
compete a la Bertrand forever after that. In each period, the cartel is detected with
probability P, after which the firms cannot form a cartel anymore. Which of the
following is true?

a. A cartel can be formed for any

b. A cartel can be formed for any
c. A cartel can be formed for any
d. A cartel can be formed for any

If the firms form a cartel, they will act as a monopolist. .

. Setting leads to , and , so
each firm makes a profit of 25. In case a firm reneges on the cartel agreement, it
would lower its price by the smallest possible amount, capture the whole market,
and therefore make a profit close to the monopoly profit of 2 . It is profitable for
each firm to form a cartel if 2 , that is if .
Question 12
Version 1 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 84. Assume that the probability that individual (
) wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 12
b. 14
c. 18
d. 21

In equilibrium, both team members maximize expected pay-offs taking the

other team member’s strategy as given. Team member 1 maximizes:

The first-order condition:

By symmetry, we may assume . This implies

Version 2 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 60. Assume that the probability that individual (
) wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 12
b. 14
c. 18
d. 15

In equilibrium, both team members maximize expected pay-offs taking the

other team member’s strategy as given. Team member 1 maximizes:
 The first-order condition:

By symmetry, we may assume . This implies

Version 3 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals . Suppose that the team members compete for
a single prize with a value of 72. Assume that the probability that individual (
) wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 36
b. 18
c. 22
d. 9

In equilibrium, both team members maximize expected pay-offs taking the

other team member’s strategy as given. Team member 1 maximizes:

The first-order condition:

By symmetry, we may assume . This implies

Version 4 Consider a team consisting of two workers. Each team member’s cost of
exerting effort equals Suppose that the team members compete for a single
prize with a value of 64. Assume that the probability that individual ( )
wins the prize equals:

How much effort does each worker exert in equilibrium?

a. 12
b. 32
c. 16
d. 8

In equilibrium, both team members maximize expected pay-offs taking the

other team member’s strategy as given. Team member 1 maximizes:

The first-order condition:

By symmetry, we may assume . This implies

Question 13
Version 1 Consider a market in which demand equals , where denotes the
price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 8. The follower produces with constant
marginal costs equal to 2. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 55, the follower 55

b. The market leader produces 54, the follower 27
c. The market leader produces 48, the follower 24
d. The market leader produces 48, the follower 30

You can find the equilibrium using backward induction. First, solve the
follower’s maximization problem:

. The FOC yields: , which

represents the follower’s best response function. Now, the leader’s
maximization problem writes:

. The FOC yields . By

substitution, the follower’s quantity is .

Version 2 Consider a market in which demand equals , where denotes the

price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 4. The follower produces with constant
marginal costs equal to 2. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 55, the follower 20

b. The market leader produces 49, the follower 24.5
c. The market leader produces 46, the follower 23
d. The market leader produces 46, the follower 25

You can find the equilibrium using backward induction. First, solve the
follower’s maximization problem:

. The FOC yields: , which

represents the follower’s best response function. Now, the leader’s
maximization problem writes:

. The FOC yields . By substitution, the

follower’s quantity is .
Version 3 Consider a market in which demand equals , where denotes the
price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 5. The follower produces with constant
marginal costs equal to 3. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 27.5, the follower 13.75

b. The market leader produces 27.5, the follower 27.5
c. The market leader produces 24, the follower 12
d. The market leader produces 24, the follower 14

You can find the equilibrium using backward induction. First, solve the
follower’s maximization problem:

. The FOC yields: , which

represents the follower’s best response function. Now, the leader’s
maximization problem writes:

. The FOC yields . By substitution, the

follower’s quantity is .

Version 4 Consider a market in which demand equals , where denotes the

price. Two companies compete on quantity à la Stackelberg. The leader produces
with constant marginal costs equal to 3. The follower produces with constant
marginal costs equal to 1. Assuming that the follower will enter the market, what is
the outcome in the subgame perfect Nash equilibrium?

a. The market leader produces 32.5, the follower 32.5

b. The market leader produces 32.5, the follower 16.25
c. The market leader produces 30, the follower 15
d. The market leader produces 30, the follower 17

You can find the equilibrium using backward induction. First, solve the
follower’s maximization problem:

. The FOC yields: 64 , which

represents the follower’s best response function. Now, the leader’s
maximization problem writes:

. The FOC yields . By substitution, the

follower’s quantity is .
Question 14
Version 1 Which of the following statements are true?

I. Copyright laws increase the market power of content creators

II. Switching costs are a source of first-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

See slides week 3 and chapter 18.1

Version 2 Which of the following statements are true?

I. Investing in overcapacity can create a first-mover advantage

II. Switching costs are a source of first-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

See slides week 3 and chapter 18.1

Version 3 Which of the following statements are true?

I. Copyright laws increase the market power of content creators

II. Search costs are a source of first-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

See slides week 3 and chapter 18.1

Version 4 Which of the following statements are true?

I. Copyright laws increase the market power of content creators

II. Technological leadership is a source of first-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

See slides week 3 and chapter 18.1

Question 15
Version 1 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2 P2
Game 1 Game 2
Left Right Left Right

Top 6,6 3,7 Top 8,3 5,2

P1 P1
Bottom 7,3 4,4 Bottom 5,2 1,1

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left

This is a dynamic game and can be solved by backward induction. The only Nash
equilibrium in Game 1 is Bottom, Right, in which case Player 1 earns 4. The only
Nash equilibrium in Game 2 is Top, Left in which case Player 1 earns 8. Hence, in the
subgame perfect Nash equilibrium Player 1 picks Game 2 and the players choose
Top and Left.

Version 2 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2
Game 1
Left Right

Top 5,5 2,7

P1
Bottom 7,2 4,4
 P2
Game 2
Left Right

Top 0,0 5,2

P1
Bottom 5,2 8,4

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left

This is a dynamic game and can be solved by backward induction. The only Nash
equilibrium in Game 1 is Bottom, Right, in which case Player 1 earns 4. The only
Nash equilibrium in Game 2 is Botom, Right in which case Player 1 earns 8. Hence,
in the subgame perfect Nash equilibrium Player 1 picks Game 2 and the players
choose Bottom and Right.

Version 3 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2 P2
Game 1 Game 2
Left Right Left Right

Top 6,5 2,7 Top 0,0 5,2

P1 P1
Bottom 7,2 3,3 Bottom 1,2 8,4

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left

This is a dynamic game and can be solved by backward induction. The only Nash
equilibrium in Game 1 is Bottom, Right, in which case Player 1 earns 3. The only
Nash equilibrium in Game 2 is Bottom, Right in which case Player 1 earns 8. Hence,
in the subgame perfect Nash equilibrium Player 1 picks Game 2 and the players
choose Bottom and Right.
Version 4 Player 1 (P1) can choose which of the following two simultaneous move games she
wants to play with player 2 (P2). Which game will she pick and what is the resulting
subgame perfect Nash equilibrium outcome?

P2 P2
Game 1 Game 2
Left Right Left Right

Top 8,7 2,5 Top 0,0 5,2

P1 P1
Bottom 7,6 4,4 Bottom 5,2 6,4

a. Game 1: Bottom, Right

b. Game 1: Top, Left
c. Game 2: Bottom, Right
d. Game 2: Top, Left

This is a dynamic game and can be solved by backward induction. The only Nash
equilibrium in Game 1 is Top, Left, in which case Player 1 earns 8. The only Nash
equilibrium in Game 2 is Bottom, Right in which case Player 1 earns 6. Hence, in the
subgame perfect Nash equilibrium Player 1 picks Game 1 and the players choose
Top and Left.
Question 16
Version 1 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 6+x,6 2,10
Player 1
Bottom 8,3 3,5

Assume that 0<x<2. Consider the following statements:

I An increase in x decreases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation

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

Therefore, if increases, decreases. The cut-off discount factor of

player 2 is not affected by x.

Version 2 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 6,6 2,10
Player 1
Bottom 8,3 3+x,5

Assume that x>0. Consider the following statements:

I An increase in x decreases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation

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
 Therefore, if increases, increases. The cut-off discount factor of
player 2 is not affected by x.

Version 3 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 5+x,6 2,10
Player 1
Bottom 8,3 3,5

Assume that 0<x<3. Consider the following statements:

I An increase in x decreases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation

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

Therefore, if increases, decreases. The cut-off discount factor of

player 2 is not affected by x.

Version 4 Consider the following game that is played repeatedly for an infinite number of
times. The two players are using trigger strategies to cooperate on the outcome
(Top, Left).

Player 2
Left Right
Top 4+x,6 2,10
Player 1
Bottom 8,3 3,5

Assume that 0<x<4. Consider the following statements:

I An increase in x increases the critical (cut-off) discount factor of Player 2 that is
needed to sustain cooperation
II An increase in x increases the critical (cut-off) discount factor of Player 1 that is
needed to sustain cooperation

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

Therefore, if increases, decreases. The cut-off discount factor of

player 2 is not affected by x.
Question 17
Version 1 A profit maximizing monopolist sells orchids. There are 100 identical consumers,
and each consumer has a demand function that is given by Q = 300 – p. The
marginal cost of raising an orchid equals 30. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be maximized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be maximized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

If all consumers have identical demand functions, the monopolist can extract the
entire consumer surplus by first degree price discrimination or two-part tariffs. In
both cases, total surplus is maximized.
Version 2 A profit maximizing monopolist sells orchids. There are 200 identical consumers,
and each consumer has a demand function that is given by Q = 320 – p. The
marginal cost of raising an orchid equals 20. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be minimized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be maximized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

If all consumers have identical demand functions, the monopolist can extract the
entire consumer surplus by first degree price discrimination or two-part tariffs. In
both cases, total surplus is maximized.
Version 3 A profit maximizing monopolist sells orchids. There are 100 identical consumers,
and each consumer has a demand function that is given by Q = 400 – p. The
marginal cost of raising an orchid equals 35. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be maximized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be maximized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false
 f all consumers have identical demand functions, the monopolist can extract the
entire consumer surplus by first degree price discrimination or two-part tariffs. In
both cases, total surplus is maximized.

Version 4 A profit maximizing monopolist sells orchids. There are 100 identical consumers,
and each consumer has a demand function that is given by Q = 600 – p. The
marginal cost of raising an orchid equals 40. Consider the following two
statements:

I. If the monopolist can engage in first degree price discrimination, welfare

(consumer surplus plus producer surplus) will be maximized.
II. If the monopolist charges a two-part tariff, welfare (consumer surplus plus
producer surplus) will be minimized.

a. Statement I is correct, statement II is false

b. Statement I is false, statement II is correct
c. Both statements are correct
d. Both statements are false

If all consumers have identical demand functions, the monopolist can extract the
entire consumer surplus by first degree price discrimination or two-part tariffs. In
both cases, total surplus is maximized.
Question 18
Version 1 In the world market for smartphones, Samsung, Apple, Huawei, and LG are the four
biggest suppliers with market shares of 30%, 30%, 10%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.22
c. 0.19
d. 0.26

The lowest possible HH index obtains if many small firms with essentially zero
market share make up the remaining 20% of the market. Therefore, the Herfindahl-
Hirschman index is at least equal to .

Version 2 In the world market for smartphones, Samsung, Apple, and Huawei are the three
biggest suppliers with market shares of 30%, 30%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.22
c. 0.19
d. 0.26

The lowest possible HH index obtains if many small firms with essentially zero
market share make up the remaining 30% of the market. Therefore, the Herfindahl-
Hirschman index is at least equal to .

Version 3 In the world market for smartphones, Samsung, Apple, Huawei, and LG are the four
biggest suppliers with market shares of 40%, 30%, 10%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.27
c. 0.24
d. 0.26

The lowest possible HH index obtains if many small firms with essentially zero
market share make up the remaining 10% of the market. Therefore, the Herfindahl-
Hirschman index is at least equal to .

Version 4 In the world market for smartphones, Samsung, Apple, and Huawei are the three
biggest suppliers with market shares of 40%, 30%, and 10% respectively. The
concentration in this market as measured by the Herfindahl-Hirschman index is at
least:

a. 0.20
b. 0.22
c. 0.24
d. 0.26

The lowest possible HH index obtains if many small firms with essentially zero
market share make up the remaining 20% of the market. Therefore, the Herfindahl-
Hirschman index is at least equal to
Question 19
Version 1 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?

a. The higher the barriers to entry, the higher the critical discount factor
b. The more demand is expected to increase in the future, the higher the critical
discount factor
c. The higher the frequency of interaction, the lower the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor

See the book, chapter 12.

Version 2 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?

a. The higher the barriers to entry, the lower the critical discount factor
b. The more demand is expected to increase in the future, the higher the critical
discount factor
c. The higher the frequency of interaction, the higher the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor

See the book, chapter 12.

Version 3 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?
a. The higher the barriers to entry, the higher the critical discount factor
b. The more demand is expected to increase in the future, the lower the critical
discount factor
c. The higher the frequency of interaction, the higher the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor

See the book, chapter 12.

Version 4 Which of the following statements about the critical (cutoff) discount factor in
collusive agreements is true?

a. The higher the barriers to entry, the higher the critical discount factor
b. The more demand is expected to decrease in the future, the higher the critical
discount factor
c. The higher the frequency of interaction, the higher the critical discount factor
d. The less demand fluctuates from one period to the next, the higher the critical
discount factor
See the book, chapter 12.
Question 20
Version 1 Consider a monopolist that operates in a market with demand
. The monopolist has a constant marginal cost of 6 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 16?

a. Total welfare increases by 1200

b. Total welfare increases by 600
c. Total welfare increases by 300
d. Total welfare decreases by 600

Before the ceiling: MR=106-2Q=6=MC, Q=50, P=56. PS=50*(56-6)=2500. CS=(106-

56)*50/2=1250. Total welfare=3750.
After the ceiling: P=16, Q=90. PS=90(16-6)=900. CS=(106-16)*90/2=4050. Total
welfare=4950.

Version 2 Consider a monopolist that operates in a market with demand

. The monopolist has a constant marginal cost of 2 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 16?

a. Total welfare increases by 870

b. Total welfare increases by 630
c. Total welfare increases by 340
d. Total welfare decreases by 630

Before the ceiling: MR=90-2Q=2=MC, Q=44, P=46. PS=44*(46-2)=1936. CS=(90-

46)*44/2=968. Total welfare=2904.
After the ceiling: P=16, Q=74. PS=74(16-2)=1036. CS=(90-16)*74/2=2738. Total
welfare=3774.

Version 3 Consider a monopolist that operates in a market with demand

. The monopolist has a constant marginal cost of 2 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 12?

a. Total welfare increases by 918

b. Total welfare increases by 622
c. Total welfare increases by 344
d. Total welfare decreases by 622
 Before the ceiling: MR=90-2Q=2=MC, Q=44, P=46. PS=44*(46-2)=1936. CS=(90-
46)*44/2=968. Total welfare=2904.
After the ceiling: P=12, Q=78. PS=78(12-2)=780. CS=(90-12)*78/2=3042. Total
welfare=3822
Version 4 Consider a monopolist that operates in a market with demand
. The monopolist has a constant marginal cost of 4 and no fixed costs, and
charges a uniform price. What happens to total welfare (the sum of consumer
surplus and producer surplus) in this market if the government implements a price
ceiling of 12?

a. Total welfare increases by 1650

b. Total welfare increases by 850
c. Total welfare increases by 375
d. Total welfare decreases by 850

Before the ceiling: MR=120-2Q=4=MC, Q=58, P=62. PS=58*(62-4)=3364. CS=(120-

62)*58/2=1682. Total welfare=5046.
After the ceiling: P=12, Q=108. PS=108(12-4)=864. CS=(120-12)*108/2=5832. Total
welfare=6696