Version A

I. Multiple Choice

(1)c. (2)c. (3)b. (4)d. (5)c. (6)a. (7)d. (8)c. (9)c. (10)c.

II. Problems

(1) [Game theory: 12 pts]

1. Enter the industry;
2. High price;
3. There is one Nash equilibrium: Old Firm plays "high price" and New Firm plays "enter the industry."

(2) [Collusion or joint profit maximization: 32 pts]

1. MR = 16 - 2Q;
2. Marginal revenue curve has vertical intercept at $16, slope of -2, and horizontal intercept at 8 thousand;
3. $10;
4. 6 thousand;
5. $12 thousand;
6. $6;
7. 10 thousand;
8. zero deadweight loss under price competition.

(3) [Cournot duopoly: 20 pts]

1. P = (14 - (q_A/200)) - (q_B/200);
2. MR_B = (14 - (q_A/200)) - (q_B/100);
3. q_B = 1200 - (q_A/2);
4. q_A = q_B = 800;
5. P = $6.

II. Critical Thinking

(1) Collusion is the best kind of market for producers because it maximizes their profits.

(2) Price competition is the best kind of market for consumers because it yields the lowest price and therefore the greatest consumer surplus.

(3) Price competition is also the best kind of market for society as a whole because it results in no deadweight loss.

Version B

I. Multiple Choice

(1)a. (2)d. (3)c. (4)b. (5)b. (6)b. (7)d. (8)b. (9)a. (10)d.

II. Problems

(1) [Game theory: 12 pts]

1. Red;
2. Blue;
3. There is no Nash equilibrium (in pure strategies). There is no pair of strategies that are best replies to each other.

(2) [Collusion or joint profit maximization: 32 pts]

1. MR = 16 - 2Q;
2. Marginal revenue curve has vertical intercept at $16, slope of -2, and horizontal intercept at 8 thousand;
3. $11;
4. 5 thousand;
5. $10 thousand;
6. $7;
7. 9 thousand;
8. zero deadweight loss under price competition.

(3) [Cournot duopoly: 20 pts]

1. P = (11 - (q_A/400)) - (q_B/400);
2. MR_B = (11 - (q_A/400)) - (q_B/200);
3. q_B = 1800 - (q_A/2);
4. q_A = q_B = 1200;
5. P = $5.

II. Critical Thinking

Same as Version A.

[end of answer key]