Question

1)

If you were a member of the Second Chicago School, which standard model of oligopoly would you think best models market performance?

	A.	Cournot
	B.	Hotelling
	C.	Bertrand
	D.	Mazur

2)

In a game, if every firm is best-responding to every other firm in a game, then

	A.	Every firm is maximizing profit conditional on what every other firm has chosen to do.
	B.	The firms strategies represent a Nash equilibrium.
	C.	No firm has any unilateral incentive to deviate.
	D.	All of the above.

3)

Instead of a pure strategy, firms may randomly choose their actions according to a probability distribution or probability density function. What kinds of strategies are these?

	A.	Mixed strategies
	B.	Random strategies
	C.	Rock-paper-scissor strategies
	D.	Stupid strategies

3.

How do we solve for the equilibrium of a two-stage game?

	A.	Backward induction
	B.	Forward instruction
	C.	Sideways injunction
	D.	Continuous function

4.

Which principle, illustrated in Hotelling's beach model, seemed to explain the way new firms tended to sell goods that were very similar, though not identical, to their competitors?

	A.	Principle of Maximum Similarity
	B.	Principle of Minimum Differentiation
	C.	Principle of Minimum Competition
	D.	Principle of Ultimate Reality

Answer 1

(1) Both (a) Cournot and (c) Bertrand models of oligopoly model the best versions of market performance.

Explanation: If firms engage in price competition, Cournot is the best; on the other hand, if quantity competition is concerned, Bertrand model is considered the best.

(2) (d) All of the above

Explanation: In a Nash Equilibrium, each player plays his best strategy, given the strategy his opponent chooses. It represents the best response of all players in the game, where no player has the incentive to deviate from his strategy.

(3) (a) Mixed Strategies

Explanation: All games do not have a pure strategy Nash Equilibrium (PSNE). In this case, players attach random probabilities to their strategies, denoting the probability with which they choose each strategy, and then solve the value of the game.

(3) (a) Backward Induction

Explanation: For a two-stage game, we use the method of backward induction where we start from the end nodes, choose the best strategy and reduce the sizeof the game. In this way, we keep choosing the best strategy from each node of a sub-game and come to the final answer, which gives us the path of best strategies and the final payoff from that path.

(4) (b) Principle of Minimum Differentiation

Explanation: According to Hotelling's law, new firms tend to sell goods that were very similar, though not identical to their competitors.