1.        The following table shows your neighborhood’s demand for drinking water. Assume that only two firms (Waterland and Aquataste) produce and sell water in this market. Each firm offers the same quality, no fixed costs are incurred in the production of water, and each firm’s marginal cost is constant and equal to $0 because either company can pump as much water as needed without cost. Because marginal cost is constant and equal to $0, total revenue is equal to total profit.

Price (per gallon)	Quantity (gallons)	Total Revenue (TR)
$0.25	1,000	$250.00
$0.50	900	$450.00
$0.75	800	$600.00
$1.00	700	$700.00
$1.25	600	$750.00
$1.50	500	$750.00
$1.75	400	$700.00
$2.00	300	$600.00
$2.25	200	$450.00
$2.50	100	$250.00
$2.75	0	$0.00

Assume that Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750.

If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would then increase from $375 to

 

A. $437.50.
B. $750.00.
C. $350.00.
D. $312.50.

 

2.        The following table shows your neighborhood’s demand for drinking water. Assume that only two firms (Waterland and Aquataste) produce and sell water in this market. Each firm offers the same quality, no fixed costs are incurred in the production of water, and each firm’s marginal cost is constant and equal to $0 because either company can pump as much water as needed without cost. Because marginal cost is constant and equal to $0, total revenue is equal to total profit.

Price (per gallon)	Quantity (gallons)	Total Revenue (TR)
$0.25	1000	$250.00
$0.50	900	$450.00
$0.75	800	$600.00
$1.00	700	$700.00
$1.25	600	$750.00
$1.50	500	$750.00
$1.75	400	$700.00
$2.00	300	$600.00
$2.25	200	$450.00
$2.50	100	$250.00
$2.75	0	$0.00

Assume that Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750.

If Aquataste reneges on the agreement and produces 350 gallons, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland’s profits would increase to _________________, which is better than the $312.50 Waterland would earn by sticking with the agreement.

 

A. $750.00
B. $312.50
C. $437.50
D. $350.00

3.        After teaching a class on game theory, your instructor announces that if every student skips the last question on the next exam, everyone will receive full credit for that question. However, if one or more students answer the last question, all responses will be graded and those who skip the question will get a zero.

Assume that there is no chance for you and your classmates to discuss the situation before taking the exam. Will the entire class skip the last question?

 

A. No, because there is always at least one selfish person in the class who will answer the question.
B. No, because the dominant strategy of the best-prepared students is to answer the last question.
C. Yes, because this strategy offers the best result for everyone.
D. Yes, because everyone assumes that all other classmates will skip the question.

4.        You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work.

Your dominant strategy is

 

A. to work hard.
B. not to work at all.
C. to work less hard.

5.        You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work.

Your partner’s dominant strategy is

 

A. to work hard.
B. not to work at all.
C. to work less hard.

6.        You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work.

Your dominant strategy is

Click to view enlarged image.

 

A. your partner works hard, and you work less hard.
B. you work hard, and your partner works less hard.
C. you both work less hard.
D. you both work hard.

7.        You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work.

If you and your partner are required to work together on a number of projects throughout the semester, what other possible equilibrium might you be able to sustain?

 

A. Your partner works hard, and you work less hard.
B. You work hard, and your partner works less hard.
C. You both work hard.
D. There is no other sustainable equilibrium.
E. You both work less hard.

8.        Which of the following markets are oligopolistic? Select all that apply.

 

A. fast food
B. passenger airlines
C. the college bookstore on your campus
D. wheat

9.        Network externalities are important for

 

A. eHarmony, a Web-based dating site.
B. AARP, an organization that advocates for seniors.
C. gas stations.