Use the following to answer questions (1) – (7): Two firms (A and B) are attempting to set up a price fixingscheme. Each firm must choose between maintaining the agreed upon price (i.e., Maintain P), or cuttingprice (i.e., Cut P). The payoff matrix is indicated below:BMaintain P Cut PMaintain P 15, 15 0, 20A Cut P 20, 0 6, 6Note: A’s payoffs (in millions of dollars) are listed 1st, while B’s payoffs (inmillions of dollars) are listed 2nd.[1] If this game is played once, then the Nash equilibrium is for A to ___ and B to ___.A. Maintain P; Maintain PB. Maintain P; Cut PC. Cut P; Maintain PD. Cut P; Cut P[2] Suppose the game is played two times, with both A and B adopting a tit-for-tat strategy. Further,suppose each player has a discount factor (ä) equal to 0.80. The corresponding interest rate (r) equals:A. 0.80B. 0.50C. 0.25D. None of the above[3] Suppose the game is played two times, with both A and B adopting a tit-for-tat strategy. Further,suppose each player has a discount factor (ä) equal to 0.80. Accordingly, we expect both players to select___ in the first play of the game and both players to select ___ in the second play of the game.A. Maintain P; Maintain PB. Maintain P; Cut PC. Cut P; Maintain PD. Cut P; Cut P[4] Continuing question (3), at the equilibrium each firm will have a present value of its profit streamacross the two plays of the game equal to:A. 27B. 19.8C. 10.8D. 9.33[5] Suppose the game is repeatedly played an infinite number of times, with both A and B adopting atriggerstrategy. If A’s discount factor (ä) = 0.80, coupled with it choosing to cheat in each play of the game,then the present value of A’s profit stream across all plays of the game equals:A. 75B. 44C. 30D. 25[6] Suppose the game is repeatedly played an infinite number of times, with both A and B adopting atrigger strategy. If A’s discount factor (ä) = 0.50, then it is best for A to cooperate forever.A. TrueB. False[7] Suppose this game is repeatedly played an infinite number of times, with both A and B adopting atrigger strategy. Of the options below, what must A’s discount factor (ä) be closest to such that it isindifferent between cooperating forever and cheating forever?A. 0.80B. 0.50C. 0.35D. 0.20[8] Bertrand competitors, producing a homogeneous product, will price as perfectly competitive firmsat the Nash equilibrium.A. TrueB. False[9] According to the kinked demand curve model, a firmexpects competing firms to increase their pricesif the firm chooses to increase its price.A. TrueB. False[10] A firm will not want to move from being a Cournot producer to a Stackelberg follower because itsprofit will likely decrease.A. TrueB. False[11] Cartel behavior is an example of explicit cooperation.A. TrueB. False[12] In the case of a quantity-setting cartel, cheating on the cartel agreement coincides with:A. producing beyond the quota.B. producing below the quota.C. producing at the quota.D. none of the above.Use the following to answer questions (13) through (24): Suppose two firms, A and B, are the only firms ina particular market and are initially competing according to the Cournot model of oligopoly. The marketdemand is given by: Q = 25 – P, where Q is the market quantity and P is the market price. Further, supposeA and B have short-run total costs given by:A’s Total Cost (TCA): TCA = 10 + 7qA (where qA is A’s quantity produced)B’s Total Cost (TCB): TCB = 10 + 7qB (where qB is B’s quantity produced)[13] Suppose A believes, regardless of how much A produces, B will produce 4 units. Accordingly, theequation of A’s marginal revenue is then:A.B.C.D. None of the above[14] Suppose A believes, regardless of how much A produces, B will produce 4 units. Accordingly, theprofit-maximizing quantity for A is then:A. 7B. 9C. 11D. None of the above[15] At the Cournot equilibrium, A will produce ___ units.A. 9B. 7C. 6D. None of the above[16] At the Cournot equilibrium, the market price equals:A. 11B. 12C. 13D. None of the above[17] Regarding the answer to question (16), the Cournot market price is higher than the monopoly pricebut lower than the perfectly competitive price.A. TrueB. False[18] At the Cournot equilibrium, A’s profit equals:A. 32B. 26C. 25D. None of the above[19] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at theStackelberg equilibrium, A will wish to produce ___ units.A. 7B. 8C. 9D. 12[20] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at theStackelberg equilibrium, the market price is higher than the answer from question (16).A. TrueB. False[21] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at theStackelberg equilibrium, A will see its profit increase compared to the answer from question (18).A. TrueB. False[22] Suppose A becomes a Stackelberg leader, while B becomes a Stackelberg follower, at theStackelberg equilibrium, B will wish to shutdown production.A. TrueB. False[23] Suppose A and B decide to form a cartel. Interested in maximizing joint profit, the market quantityshould be set equal to:A. 12B. 9C. 7.5D. None of the above[24] Suppose a third firm entered the market, having the same cost structure as firms A and B. If thesethree firms behave according to the Cournot model, then the market price would be ____ as the answer inquestion (16).A. lowerB. higherC. the sameD. All of the above are possible[25] Cooperation can be sustained by playing the prisoners’ dilemma (cartel) game a finite number ofperiods, coupled with a tit-for-tat strategy.A. TrueB. FalseUse the following to answer questions (26) – (31): Consider a firm faces the following demand function:q = 20 – 4p for 0 # q # 4,q = 12 – 2p for 4 # q # 12,where q is the quantity demanded of the firm’s product and p is the price charged by the firm.[26] At p = 2, quantity demanded equals:A. 12B. 8C. 6D. 4[27] Suppose the firm’s marginal cost and average total cost are both constant at 3.00. What price shouldthe firm set?A. 4.50B. 4.00C. 3.50D. 3.00[28] Suppose the firm’s marginal cost and average total cost are both constant at 2.75. What price shouldthe firm set?A. 2.75B. 3.00C. 4.00D. 4.25[29] Suppose the firm’s marginal cost and average total cost are both constant at 2.50. What price shouldthe firm set?A. 4.00B. 3.00C. 2.50D. 2.00[30] Suppose the firm’s marginal cost and average total cost are both constant at 2.25. What price shouldthe firm set?A. 2.25B. 3.00C. 4.00D. 4.25[31] The above demand adheres to which model of oligopoly behavior?A. BertrandB. Infinitely repeated prisoners dilemmaC. StackelbergD. None of the aboveUse the following to answer questions (32) and (33):Imagine Frida receives the following payoffs over time: Payoff in period 1 (today) = $300, Payoff in period2 = $200, and Payoff in period 3 = $400.[32] Assuming Frida’s discount factor (ä) equals zero, then the accumulated present value of Frida’spayoff stream over the 3 periods equals:A. $900B. $500C. $300D. None of the above[33] Assuming Frida’s discount factor (ä) equals 0.50, then the accumulated present value of Frida’spayoff stream over the 3 periods equals:A. $900B. $500C. $300D. None of the aboveUse the following to answer questions (34) – (37):[34] Imagine two firms, A and B, are Bertrand price competitors, with each facing the following pricereaction functions:Firm A: Firm B:Accordingly, at the Bertrand equilibrium, firm A sets its price at ___, while firm B sets its price at ___.A. 200; 100B. 400; 1000C. 300; 300D. None of the above[35] The Bertrand equilibrium corresponds to a Nash equilibrium.A. TrueB. False[36] It must be that the products produced by A and B are differentiated.A. TrueB. False[37] If PB increases, it must be that the demand for A’s product will decrease.A. TrueB. False[38] Suppose two firms, A and B, form a cartel, with each producing 50 units of output (correspondingto the joint profit maximizing quota outputs). If B produces 50 units, then A’s _______ will be greater thanits _______ at its quota output level.A. average total cost; priceB. marginal cost; marginal revenueC. marginal revenue; marginal costD. marginal revenue; price[39] Suppose firms 1 and 2 are engaging in a price fixing scheme, a signal to firm 1 that firm 2 hascheated on the agreement is if:A. the market price increases.B. the market quantity decreases.C. firm 1’s sales decrease.D. both firms adopt a meet the competition clause.[40] Imagine firms A and B compete according to the Cournot model. In the graph below, A’s reactioncurve is labeled RA, while B’s reaction curve is labeled RB.Suppose B’s quantity equals 0, then A’s best response to that quantity is to set its quantity equal to:A. 18B. 25C. 28D. 50

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